Understanding Federal Student Loan Status

If you have Federal Student Loans, there are a couple of different types of loan statuses to be aware of so you don’t pay more on your student loans than you need to.

Repayment

Repayment is as simple as it sounds – it’s when you are making payments on your loans. It is your responsibility to make sure you are in repayment and that you have selected the optimal payment plan for your situation. If you drop below half-time at school or take a leave of absence, your loans will generally move into repayment after a grace period. Your loans must be in repayment for you to receive credit for federal loan forgiveness programs.

Forbearance

Forbearance is a period of time when you are not required to make payments. Federal servicers will allow you to enter forbearance basically anytime you would like. However, forbearance is often the worst thing you can do. During forbearance, your loans accrue interest. At the end of your forbearance, any interest accrued will be added to your principal balance through capitalization. This causes your loans to grow even faster. Periods of forbearance will also disqualify you from receiving credit for loan forgiveness programs. Avoid forbearance at all costs.

Please note: Under the CARES Act of March 2020, those with direct federal student loans are allowed a temporary pause on payments and interest. This period of time is called an administrative forbearance, and your loan status may show forbearance. All months since March 2020 will count as credit to federal student loan forgiveness programs, even with loans in forbearance. This means if you have made no payments since March 2020, they’ll consider your forbearance months as credit to federal student loan forgiveness programs (PSLF requires qualifying employment).

Deferment

Deferment puts payments on hold, and they are commonly mixed up with forbearance. Both don’t require payments, but deferment usually occurs when you’re enrolled in school. Subsidized loans typically don’t grow during periods of deferment while unsubsidized loans do.

Grace Period

A grace period occurs when you graduate from school. Most loans have a six-month grace period. During the grace period, you won’t be required to make payments on your loans. However, interest will continue to grow on your loans. After you exit the grace period, your accrued interest will capitalize (see below). If you’d like to opt out of the grace period, you can consolidate your loans and indicate you’d like to skip the grace period. Note: if your enrollment drops below half-time or you take a leave of absence during school, your loans will move into grace period and subsequently into repayment.

Delinquent

The day you miss a payment, your loans will become delinquent. Delinquent loans will quickly begin to impact your credit. Rather than allowing your loans to become delinquent, consider income-driven repayment (IDR) or, as a last resort, forbearance.

Default

After loans have been delinquent for 270 days, your loans will move into default. Default is a tough situation for the borrower, because you will no longer be able to receive additional financial aid, you will not receive credit for loan forgiveness programs, and your credit score will be severely impacted. If you are in default, we recommend you take immediate action to rehabilitate your loans.

Interest Capitalization

Interest capitalization is when unpaid interest accrued on your loans is added to your principal balance. This causes a higher principal balance due on your loans. Your interest rate is then charged on your higher principal, which causes your loans to grow faster.

Interest capitalization does not automatically occur in most cases. There are several triggers which cause unpaid interest to capitalize to the loan balance. 

Here are the triggers:

  • Loan enters repayment
  • Deferment ends 
  • Forbearance ends
  • Grace period ends
  • Loan defaults
  • Loan consolidations
  • Failure to complete annual income recertification
  • Switch repayment plans
  • Private refinances

In general, avoid interest capitalization to prevent increasing the overall cost of your loan. However, there are some situations where allowing your interest to capitalize makes sense. Schedule a time with an expert to find when it’s appropriate.

Federal student loan statuses are just one of the pieces you need to know when borrowing and deciding on federal student loan repayment. The better versed you are in each, the less you will pay on your student loans. A typical borrower repayment journey will take you through most of these. We highly recommend avoiding forbearance, delinquency, and default. If you’re having a hard time making payments, consider an IDR plan first before forbearance. If payments are still out of reach in an IDR plan, consult one our student loan pros.