Some college students, like these at North Carolina State University on July 31, are moving in (carefully) for the fall semester—but others are thinking about taking a gap year.
Photo: Gerry Broome/Associated PressWith so much in flux in people’s lives because of the coronavirus pandemic and universities going online or partially online, many college students are thinking about taking a gap year.
For students who have already amassed student loans, however, the decision can have financial ramifications. That’s because loan repayment is often deferred while students are in school; for many loans, payments begin six months after a student leaves school, drops below half-time enrollment or graduates.
One workaround for these students is to opt for a shorter gap period, says Juan Carlos Cruz, founder of Britewater Financial Group, a wealth-management firm with offices in New York and Newark, N.J.
For instance, they could consider taking a six-month break versus a whole year. By re-enrolling before the six-month period ends, the clock on federal loans would be reset and the student wouldn’t have to start making payments, Mr. Cruz says.
Private student-loan borrowers should check their loan agreement to determine what the grace period is, if any. Most private loans come with a six-month grace period, but some companies offer up to nine months.
Students planning to take a longer hiatus from school may have other options. Here are a few possibilities:
1. Enroll in an income-driven repayment plan
Income-driven repayment could be a viable option for borrowers with federal loans; it’s not commonly offered to borrowers with private student loans.
Most federal student loans are eligible for at least one of four available income-driven repayment plans, according to the Education Department’s Federal Student Aid office.
Payments in this type of plan are based on the borrower’s most recent tax return, which means students who didn’t work the previous year might not have to pay anything, Mr. Cruz says.
Borrowers who would like to repay their loans under an income-driven plan when their grace period ends are advised to apply at least two months prior, according to Federal Student Aid.
Keep in mind that income-driven repayment plans usually lower borrowers’ federal student-loan payments, but these plans have a longer repayment period than, say, a standard repayment plan, so borrowers can end up paying more in total interest charges—sometimes significantly more—over the life of the loan.
In addition, the borrower may be required to pay income tax on any amount of the loan that is forgiven, if a balance remains at the end of the extended repayment period, according to Federal Student Aid. Also, borrowers on income-driven repayment must recertify their income every year.
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2. Consider deferment or forbearance
Some borrowers can qualify for a deferment or forbearance to pause payments on their federal loans, if they meet certain criteria. However, in most cases, interest will accrue during a borrower’s period of deferment or forbearance (one exception is in the case of certain forbearances, such as the one offered as a result of the pandemic). So a borrower’s balance will increase, resulting in the borrower paying more over the life of the loan.
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Another consideration: If a borrower is pursuing loan forgiveness, any period of deferment or forbearance likely won’t count toward forgiveness requirements. This means the borrower will stop making progress toward forgiveness until repayment resumes.
Those with private loans can consider applying for forbearance. Be sure the lender approves the forbearance in writing and review the terms carefully, Mr. Cruz says. Many private lenders offer favorable terms, but offers vary.
Another option, since most private loans are cosigned, would be to ask the cosigner (often a parent) to make the payments, if the cosigner is willing and able.
3. Switch to a community college for now
Students who are taking time off for monetary reasons may be able to transfer to a community college, where they can do their prerequisite classes at a lower cost. As long as they are enrolled at least half time, students shouldn’t have to start making payments on their loans. Just make sure your lenders know you are enrolled at a new school so your loans don’t enter repayment; don’t leave it to chance that the new school will report your enrollment.
Make sure your credits will be transferable before enrolling, Mr. Cruz advises. Also, discuss your plans with your current university and ask if there’s a way to re-enroll. “Just do your due diligence; you may be surprised on some of the flexibility these schools may allow, especially during these pandemic times,” Mr. Cruz says.
Ms. Winokur Munk is a writer in West Orange, N.J. She can be reached atreports@wsj.com.
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Time for a College ‘Gap Year’? Here’s What to Consider - The Wall Street Journal
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