Making Payments During Deferment or Grace Periods

Making a loan payment during a period of grace, deferment or forbearance can greatly lower the total amount you pay over the life of your loan. For loans that do not charge interest during grace or deferment, any payments you make during this period will reduce your principal balance. When interest begins to accrue, it will be based on a smaller balance, thus reducing the total interest you have to pay.

Making payments on loans that charge interest during grace or deferment periods, or for any loans in forbearance also reduces your total obligation. While the general rule of thumb is to pay the interest "as you go" for loans accruing interest, you may want to make payments to reduce the principal balance, rather than (or in addition to) the interest.

The chart below demonstrates the difference between making interest-only payments and paying off a small percentage of the principal balance. The example is based on a $10,000 private loan (such as the Alternative Loan Program available through the Association of American Medical Colleges) and assuming an interest of 8.25 percent accrues during forbearance.

Private Loan Pay
no interest
during forbearance
Pay
interest only
(monthly)
during forbearance
Pay
interest and
some principal
(monthly)
during forbearance
Three-year forbearance 0.00 73.75 100.00
Loan balance at end of forbearance 12,896.90 10,000.00 8,922.19
Plus 2% fee (added at repayment) 257.94 200.00 178.44
Total due 13,154.84 10,200.00 9,100.63
Monthly payment
(20-year repayment)
117.09 90.79 81.00
Total principal + interest 28,101.94 24,444.69 23,041.18

Source: Norstar Guaranty Agency

If you want to make payments during grace, deferment or forbearance, call your lender or servicer. Ask them to calculate the interest savings if you make interest-only payments, payments on the principal ONLY or payments of both accrued interest and principal.