Is interest deferment on your student loans worth it?
"Total deferment" for student loans is a simple concept. It means that no payments at all are made on a loan while you’re enrolled in school. This feature may sound like a terrific benefit, allowing you to enjoy school now and not worry about paying till later.
But before deferring payment on your student loan, consider that in the long run, "total deferment" can make a private loan thousands of dollars more expensive than it otherwise would have been. The reason is simple: interest is continually accruing and being added to the principal balance of your loan during the deferment period. After four years of "total deferment," you could be looking at a principal balance that’s significantly larger than the original amount of your loan. You don’t have to be an accounting major to see that you’ll be paying interest on interest.
Here’s what we mean. Let’s say you’ve got a hypothetical $10,000 private loan with a typical "total deferment" period of four years, a commonly available variable interest rate, and an industry-standard 240 monthly payments.* Once your "total deferment" period is up, the principal balance of your loan will have inflated to $14,239 - more than 40% more than the original amount of your loan - because of the addition of accrued but unpaid interest. By the time you’re done paying off the loan, your $10,000 loan will have actually cost you $16,950 in finance charges alone.
Total deferment can also result in larger monthly payments once the repayment period starts. If these payments are beyond the means of recent college graduates, they can results in missed payments and credit problems. Despite the highly profitable nature of total deferment loans, LendingTree Student Loans doesn’t offer a total deferment private loan product, because we are philosophically opposed to the idea of students having to pay interest on interest. We also don’t believe in hidden costs - like the "repayment fee" some lenders charge at the end of the total deferment period.
* Example assumes a total repayment period of 288 months consisting of a principal and interest deferment period of 48 months followed by 240 monthly payments of principal and interest, an original principal balance of $10,695 (which includes a 6.50% origination fee), and a 7.22% Variable Interest Rate (assumes 2.57% LIBOR Rate plus margin of 4.65%). The Annual Percentage Rate for this example loan is 7.84%, which may be adjusted quarterly based on changes in the LIBOR Rate or the margin. No down payment.
NOTE: Example is HYPOTHETICAL, but is typical of available private loans offering a "total deferment" option. LendingTree Student Loans does not offer total deferment loans.
LendingTree Student Loans offers a partial deferment private loan product - one that allows you to make lower payments of interest only while you’re in school. This means:
- Your payments while you attend school will stay small and manageable.
- After you graduate, your payments won’t balloon.
- Your loan will cost you a lot less than a similarly sized "total deferment" loan that lets interest accumulate during the deferment period.
- If you’re a student paying off your loan on your own, you’ll find that making interest-only payments while in school will help you develop sound money management habits.
Let’s revisit that $10,000 loan we mentioned before, though this time it has a partial deferment feature with the same deferment period, the same number of monthly payments, and a comparable APR.** Since you’ll pay interest as it accrues while you’re in school, your principal balance at the end of the deferment period will remain fixed at $10,000 plus your origination fee. And when it’s paid off, the partial deferment loan will cost $6,083 less in finance charges than that comparably sized "total deferment" loan that accrued interest during the deferment period.
** Example assumes a total repayment period of 240 months, consisting of 48 monthly payments of interest only followed by 192 monthly payments of principal and interest, an original principal balance of $10,526 (which includes a 5.00% origination fee), and a 7.25% Variable Interest Rate (assumes 5.75% Prime Rate plus a 1.50% margin). The Annual Percentage Rate for this example loan is 7.87%, which may be adjusted monthly based on changes in the Prime Rate or applicable margin. Interest rates and origination fee may vary based on loan type, repayment option, credit history and whether a co-borrower is included. No down payment.
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