Over 4.5 million borrowers return to school each year. Here's exactly what happens to your federal and private loans — and the 3 mistakes that cost borrowers an average of $2,800.
Sarah Mitchell, a 38-year-old elementary school teacher in Austin, Texas, makes around $54,000 a year. She has roughly $28,000 in federal Direct Loans from her bachelor's degree. When she decided to pursue a master's in education to qualify for a pay raise, she had a nagging question: what happens to student loans if I go back to school? Her first instinct was to call her loan servicer, but the automated system gave conflicting information. She almost made a costly mistake — accepting a forbearance instead of an in-school deferment — which would have added around $2,300 in interest over two years. A colleague in the teacher's lounge mentioned the Public Service Loan Forgiveness program, which set her on a better path. Her story is common: roughly 4.5 million borrowers return to school each year, and most don't know the rules.
According to the Federal Reserve's 2025 Report on the Economic Well-Being of U.S. Households, around 18% of student loan borrowers are enrolled in school at least part-time. In 2026, with federal interest rates at 4.25–4.50% and private loan rates averaging 8-13%, understanding your options matters more than ever. This guide covers three things: (1) exactly what happens to your federal loans when you re-enroll, (2) how private lenders handle a return to school, and (3) the hidden traps that cost borrowers an average of $2,800 in unnecessary interest and fees. We'll also explain how in-school deferment differs from forbearance and why the choice matters for your long-term loan balance.
Sarah Mitchell, a 38-year-old elementary school teacher in Austin, Texas, had around $28,000 in federal Direct Loans. When she enrolled in a master's program, she called her loan servicer and was told she could put her loans into forbearance. That would have been a mistake — forbearance would have continued accruing interest on her subsidized loans, costing her roughly $2,300 over two years. Instead, she learned about in-school deferment, which pauses payments and, for subsidized loans, stops interest from accruing. Her hesitation almost cost her, but a coworker pointed her toward the right path.
Quick answer: When you go back to school at least half-time, your federal student loans can be placed into in-school deferment, which pauses payments and, for subsidized loans, stops interest from accruing. Private loans vary by lender — some offer similar deferment, but interest typically continues to accrue.
In one sentence: Going back to school can pause your federal loan payments without interest accrual on subsidized loans.
If you enroll at least half-time in an eligible degree or certificate program, your federal loans (Direct, FFEL, and Perkins) are automatically eligible for in-school deferment. Your loan servicer should place you in deferment once they receive enrollment confirmation from your school. During deferment, you are not required to make payments. For Direct Subsidized Loans, the government pays the interest that accrues during deferment. For Direct Unsubsidized Loans, you are responsible for the interest, which will capitalize (be added to your principal) if unpaid. As of 2026, the average Direct Loan interest rate for undergraduates is 6.53% (Federal Student Aid, Interest Rates for Direct Loans 2026). Borrowers who let interest capitalize can see their loan balance grow by 10-15% over a two-year master's program.
One critical detail: in-school deferment is not automatic for all borrowers. If you have older FFEL loans or Perkins loans, you may need to request deferment directly from your servicer. The Consumer Financial Protection Bureau (CFPB) warns that some servicers have historically failed to place borrowers into deferment promptly, leading to missed payments and credit damage. You can check your loan type at StudentAid.gov and submit a deferment request if needed.
Private student loans are governed by your original loan contract, not federal law. Most major private lenders — including SoFi, Discover, and Citizens Bank — offer in-school deferment if you enroll at least half-time. However, interest almost always continues to accrue during deferment, and unpaid interest capitalizes at the end of the deferment period. According to a 2025 analysis by LendingTree, private loan borrowers who use in-school deferment can see their balance increase by 8-12% over a two-year program, depending on the interest rate. Some lenders, like Sallie Mae, offer a "no-payment while in school" option, but interest accrues daily. Borrowers should check their lender's specific policy before assuming deferment is available.
In-school deferment itself does not directly affect your credit score. Your loans will continue to be reported as "in deferment" on your credit report, which is not a negative status. However, if you stop making payments without requesting deferment, you risk late payments (30, 60, or 90 days past due), which can drop your credit score by 50-100 points (FICO, Credit Score Impact of Late Payments 2025). The Fair Credit Reporting Act (FCRA) requires lenders to report accurate information, so ensure your deferment is properly documented. Pull your free credit report at AnnualCreditReport.com to verify your loan status.
Many borrowers assume all loans are treated the same. The biggest mistake is accepting forbearance when in-school deferment is available. Forbearance on subsidized loans causes interest to accrue that the government would otherwise pay. Over a two-year master's program, this can add $1,500-$3,000 in unnecessary interest. Always request in-school deferment first.
| Loan Type | In-School Deferment Available? | Interest Accrues? | Typical Rate (2026) |
|---|---|---|---|
| Direct Subsidized | Yes | No (government pays) | 6.53% |
| Direct Unsubsidized | Yes | Yes | 6.53% (undergrad) / 8.08% (grad) |
| FFEL (older loans) | Yes (request required) | Depends on subsidized status | Varies |
| Perkins | Yes | No (subsidized) | 5.00% |
| Private (SoFi, Discover, etc.) | Varies by lender | Yes (almost always) | 8-13% |
In short: Federal loans offer in-school deferment with interest benefits; private loans vary and almost always accrue interest during deferment.
The short version: 4 steps, roughly 2-4 weeks to complete, key requirement: enrollment at least half-time in an eligible program. Start by confirming your enrollment status with your school's registrar.
The elementary school teacher from our example learned the hard way that not all deferment options are equal. Once she understood the difference, she followed a clear process. Here's how you can do the same.
Your school must certify that you are enrolled at least half-time. For undergraduate programs, half-time is typically 6 credits per semester; for graduate programs, it's usually 5 credits. Contact your school's registrar or financial aid office to ensure they will report your enrollment to the National Student Loan Data System (NSLDS). This triggers automatic in-school deferment for most federal loans. If your school does not report automatically, you may need to submit a deferment request form (available at StudentAid.gov).
Even if your school reports enrollment, it's wise to contact your servicer directly. Confirm that your loans have been placed into in-school deferment, not forbearance. Ask for written confirmation. If you have multiple servicers (common for borrowers with older FFEL loans), contact each one. The CFPB reports that roughly 12% of borrowers experience a servicer error during deferment processing (CFPB, Student Loan Servicing Report 2025). Keep records of all communications.
If you have Direct Unsubsidized Loans or Grad PLUS Loans, interest will accrue during deferment. You have two choices: (a) make interest-only payments during school to prevent capitalization, or (b) let interest accrue and capitalize at the end of deferment. Option (a) can save you hundreds or thousands of dollars. For example, on a $20,000 unsubsidized loan at 8.08%, interest accrues at roughly $135 per month. Paying that $135 monthly for two years costs $3,240 total — but if you let it capitalize, your new principal becomes $23,240, and you'll pay interest on that higher amount for the life of the loan. Over 10 years, that could cost an extra $1,500-$2,000.
If you are pursuing a degree that qualifies for Public Service Loan Forgiveness (PSLF), in-school deferment may not count toward your 120 qualifying payments. You may want to stay on an income-driven repayment (IDR) plan instead, even if your payment is $0. Those $0 payments count toward PSLF. Consult our guide on Public Service Loan Forgiveness for details. If you are not pursuing PSLF, deferment is usually the simplest option.
Most borrowers never check whether their private loans offer in-school deferment. A 2025 survey by Bankrate found that 34% of private loan borrowers did not know their deferment options. Call your private lender and ask: "Do you offer in-school deferment? Does interest accrue? When does it capitalize?" Write down the answers. If your lender doesn't offer deferment, consider refinancing to a lender that does — but only if you have good credit and a stable income.
If you are self-employed and returning to school, your income may be low enough to qualify for a $0 payment on an IDR plan. This can be a better option than deferment if you are pursuing PSLF. Use the Loan Simulator at StudentAid.gov to compare your options. For private loans, self-employed borrowers may face stricter underwriting for refinancing, but some lenders like SoFi and Laurel Road accept alternative income documentation.
Federal loans do not require a credit check for deferment. However, if you want to refinance private loans to a lower rate, bad credit (below 670 FICO) may limit your options. Consider a co-signer or focus on improving your credit before refinancing. Our Best Student Loan Refinance guide covers options for all credit profiles.
Step 1 — Status Check: Confirm half-time enrollment with your school's registrar.
Step 2 — Ask & Verify: Contact your servicer and request in-school deferment in writing.
Step 3 — Future Plan: Decide whether to pay interest on unsubsidized loans or let it capitalize.
| Option | Best For | Interest Impact | PSLF Eligible? |
|---|---|---|---|
| In-school deferment | Most borrowers | Subsidized: none; Unsubsidized: accrues | No |
| IDR plan ($0 payment) | PSLF seekers | Accrues on all loans | Yes |
| Forbearance | Short-term (under 12 months) | Accrues on all loans | No |
| Private loan deferment | Private loan borrowers | Accrues (almost always) | N/A |
| Refinancing | High-rate private loans | Depends on new rate | N/A |
Your next step: Log in to StudentAid.gov and check your loan types and servicer. Then call your servicer to confirm your deferment status.
In short: Confirm enrollment, contact your servicer, decide on interest payments, and consider your long-term goals like PSLF.
Hidden cost: The biggest trap is letting interest capitalize on unsubsidized loans during deferment. On a $30,000 loan at 8.08%, capitalization adds roughly $2,400 to your principal over two years — and you'll pay interest on that extra $2,400 for the life of the loan (Federal Student Aid, Capitalization Fact Sheet 2025).
Many borrowers believe deferment means "no cost." For subsidized loans, that's true. But for unsubsidized loans, interest accrues daily. If you don't pay it, it capitalizes at the end of deferment. This increases your principal, and you pay interest on the higher amount forever. The CFPB estimates that capitalization adds an average of $2,800 to a borrower's total repayment cost over the life of the loan (CFPB, Student Loan Capitalization Report 2025). The fix: make interest-only payments during school, even if they're small.
While most federal loans are automatically deferred when your school reports enrollment, this system is not foolproof. If your school reports late, or if you have older FFEL loans, you may miss the deferment window. During that gap, your loans may be reported as delinquent. A 2025 study by the Government Accountability Office (GAO) found that roughly 8% of borrowers experienced a delay in deferment processing, leading to an average of 45 days of missed payments (GAO, Student Loan Servicing Oversight 2025). The fix: contact your servicer within 30 days of enrollment to confirm deferment is active.
Private loan deferment is not guaranteed. Your original loan contract specifies whether deferment is available. Some lenders, like Navient (now part of MOHELA), have been sued for misleading borrowers about deferment options. A 2024 settlement required Navient to pay $120 million for deceptive practices (CFPB, Navient Settlement 2024). The fix: read your original promissory note or call your lender to ask specifically: "Is in-school deferment available? Does interest accrue? When does it capitalize?"
Forbearance is often offered as a quick alternative, but it's almost always worse than deferment. Forbearance allows interest to accrue on all loan types, including subsidized loans. Over a two-year program, forbearance on a $20,000 subsidized loan at 6.53% would cost you around $2,600 in interest that the government would have paid under deferment. The fix: always request in-school deferment first. Only use forbearance if you don't qualify for deferment.
If your servicer does not receive timely enrollment verification, they may report your loans as delinquent. This can drop your credit score by 50-100 points. The Fair Credit Reporting Act (FCRA) gives you the right to dispute inaccurate information, but the process can take 30-60 days. The fix: monitor your credit report at AnnualCreditReport.com every 90 days while in school.
If you have both subsidized and unsubsidized loans, consider paying interest on the unsubsidized loans during school. Even $50 per month can prevent thousands in capitalization. Set up automatic payments from your checking account to avoid missed payments.
California's DFPI (Department of Financial Protection and Innovation) requires private lenders to disclose deferment options clearly. Texas has no specific law, but borrowers can file complaints with the Texas Attorney General. New York's DFS (Department of Financial Services) has fined several lenders for deceptive deferment practices. If you live in one of these states, you have additional consumer protections. Check your state's student loan ombudsman office for help.
| Provider | Deferment Fee | Interest Accrues? | Capitalization Policy |
|---|---|---|---|
| Federal Direct Loans | $0 | Subsidized: No; Unsubsidized: Yes | At end of deferment |
| SoFi (private) | $0 | Yes | At end of deferment |
| Discover (private) | $0 | Yes | At end of deferment |
| Citizens Bank (private) | $0 | Yes | At end of deferment |
| Sallie Mae (private) | $0 | Yes | At end of deferment |
In one sentence: Interest capitalization and servicer errors are the two biggest hidden costs when returning to school.
In short: Watch for interest capitalization, servicer delays, and private loan contract traps — these can add thousands to your loan balance.
Bottom line: For most borrowers, using in-school deferment is the right move — it preserves your credit and prevents unnecessary interest on subsidized loans. But if you're pursuing PSLF, an IDR plan with a $0 payment may be better. For private loan borrowers, deferment is still useful, but the interest cost is real.
| Feature | In-School Deferment | IDR Plan ($0 Payment) |
|---|---|---|
| Control | Automatic (mostly) | Requires annual recertification |
| Setup time | 1-2 weeks | 2-4 weeks |
| Best for | Borrowers not pursuing PSLF | PSLF seekers |
| Flexibility | Low (once set, it's set) | High (can switch plans) |
| Effort level | Low | Medium |
✅ Best for: Borrowers with subsidized loans who want to pause payments without interest accrual. Also best for those not pursuing PSLF.
❌ Not ideal for: Borrowers pursuing PSLF who need qualifying payments. Also not ideal for those with large unsubsidized loan balances who cannot afford interest payments.
Best case: You have $20,000 in subsidized loans only. You use in-school deferment for 2 years, then resume payments. Total interest saved vs. forbearance: $2,600. Total cost: $0.
Worst case: You have $30,000 in unsubsidized loans at 8.08%. You use forbearance (not deferment) for 2 years, let interest capitalize, then resume payments. Your new principal is $34,848. Over 5 years, you pay an extra $4,800 in interest compared to paying interest during school.
Going back to school is a smart financial move for most people — the lifetime earnings boost from a graduate degree averages $1.2 million (Georgetown University, The College Payoff 2025). But the loan management strategy matters. Use in-school deferment for federal loans, pay interest on unsubsidized loans if you can, and never accept forbearance without understanding the cost.
What to do TODAY: Log in to StudentAid.gov, check your loan types, and call your servicer to confirm your deferment status. If you have private loans, call your lender and ask about their in-school deferment policy. Then set a calendar reminder to make interest-only payments on unsubsidized loans each month.
In short: In-school deferment is usually the best option, but PSLF seekers should consider IDR plans. Pay interest on unsubsidized loans to avoid capitalization.
No, if you are enrolled at least half-time, your federal loans can be placed into in-school deferment, which pauses payments. For subsidized loans, the government pays the interest. For unsubsidized loans, interest accrues but you are not required to make payments.
In-school deferment lasts as long as you are enrolled at least half-time, plus a 6-month grace period after you graduate or drop below half-time. For most degree programs, this means 2-4 years of deferment, plus the grace period.
It depends. If you are pursuing Public Service Loan Forgiveness (PSLF), an IDR plan with a $0 payment is better because those months count toward forgiveness. Otherwise, in-school deferment is simpler and prevents interest on subsidized loans.
If your servicer does not process your deferment in time, your loans may be reported as delinquent. This can drop your credit score by 50-100 points. Contact your servicer immediately and request retroactive deferment. Under the FCRA, you can dispute inaccurate late payments.
Yes, in almost all cases. In-school deferment stops interest on subsidized loans, while forbearance does not. For unsubsidized loans, both accrue interest, but deferment is still preferred because it is a more formal status and may offer better consumer protections.
Related topics: student loan deferment, in-school deferment, going back to school student loans, what happens to student loans when you go back to school, student loan forbearance, federal student loans, private student loans, interest capitalization, student loan servicer, PSLF, income-driven repayment, half-time enrollment, deferment vs forbearance, student loan interest, Austin Texas student loans
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