College Q&A: Should I Defer Loan Payments If I'm Working Part-Time?

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Each week, we will answer a real question from readers on education costs and how to pay for college. If you have a question, feel free to send it to editors@mainstreet.com.

Q: "I just got out of college and I can only find part-time work. Will this affect whether or not I can defer payments on my student loans? Or would I be in a better situation by not taking the part-time job so I can keep deferring and wait for a full-time gig instead?" - Martin, Ala.

A: The eligibility criteria for the economic hardship deferment are complicated, but generally if you are earning less than 150% of the poverty line you will qualify. You can check whether you will qualify by using the Economic Hardship Deferment Calculator on the FinAid site.

Using a deferment or forbearance, however, will dig your debt into a deeper hole, making it more difficult to repay. During a deferment the government pays the interest on subsidized loans, but the interest on unsubsidized loans is capitalized, thereby adding it to the loan balance.

During a forbearance the interest on both subsidized and unsubsidized loans is capitalized if its unpaid by the borrower. Just a few years of nonpayment will cause the loan balance to explode, as demonstrated by a chart on the third page of the Quick Reference Guide on Repaying Student Loans. Four years of non-payment, for example, would double the cost of the loan.

Deferment and forbearance options are also limited. There’s a three-year cap on deferments and a five-year cap on forbearances, and you must reapply every year. So with all this in mind, it is best to save deferments and forbearances for true emergencies, such as medical or maternity leave or complete unemployment.

A better approach would be to use an alternate repayment plan to reduce your monthly payments to affordable levels. The income-based repayment plan bases the monthly payments on a percentage of your discretionary income, as opposed to the amount you owe.

If you don’t qualify for income-based repayment, then extended repayment will yield the lowest monthly payment. Use the Income-Based Repayment Calculator on the FinAid site to calculate your monthly payments under income-based repayment.

Given that unemployment rates remain high and will not fully recover for about four years, you should take the jobs you can get. A part-time job will help you pay the bills, plus a part-time job can also turn into a full-time job, or make it easier to get full-time employment.

Another idea is to find a second part-time job to supplement your income. Two part-time jobs won’t equal a single full-time job, given the lack of benefits, but it's still better than nothing.

If you have the time, volunteering can provide highly transferrable skills that can make up for a lack of experience. Moreover, you can earn an education award of several thousand dollars by volunteering through the AmeriCorps program. These education awards can be used to repay your federal student loans.

Look outside your major to broaden your search for a full-time job. Explore the listings on traditional job boards like Monster.com. Leverage social media websites like LinkedIn and Facebook and your friends and family to try to find jobs. Alumni networks and professional associations can also be good sources for job leads.

Finally, you could escape from the job market by going back to college to get a graduate or professional degree. Your undergraduate loans will be in an in-school deferment while you are enrolled in graduate school. Piling on more debt for a graduate degree isn’t necessarily an ideal solution, but earning an additional credential might help you get a better job when the job market has fully recovered in three to four years. Still, be sure to minimize your debt, so that your debt at graduation is less than your expected starting salary.

—Mark Kantrowitz is president of MK Consulting Inc. and publisher of the FinAid.org and FastWeb.com. He has testified before Congress about student aid on several occasions and is on the editorial board of the Council on Law in Higher Education.

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