diff --git a/IHaskell.cabal b/IHaskell.cabal
index 8ef35480..30bc204a 100644
--- a/IHaskell.cabal
+++ b/IHaskell.cabal
@@ -93,6 +93,7 @@ library
                    IHaskell.Eval.Stdin
                    IHaskell.Eval.Hoogle
                    IHaskell.Eval.ParseShell
+                   IHaskell.Eval.Util
                    IHaskell.IPython
                    IHaskell.Message.Parser
                    IHaskell.Message.UUID
@@ -118,6 +119,7 @@ executable IHaskell
              IHaskell.Eval.Stdin
              IHaskell.Eval.Hoogle
              IHaskell.Eval.ParseShell
+             IHaskell.Eval.Util
              IHaskell.IPython
              IHaskell.Message.Parser
              IHaskell.Message.UUID
diff --git a/src/IHaskell/Eval/Evaluate.hs b/src/IHaskell/Eval/Evaluate.hs
index d5b61bc3..3c9d3934 100644
--- a/src/IHaskell/Eval/Evaluate.hs
+++ b/src/IHaskell/Eval/Evaluate.hs
@@ -65,6 +65,7 @@ import IHaskell.Eval.Parser
 import IHaskell.Eval.Lint
 import IHaskell.Display
 import qualified IHaskell.Eval.Hoogle as Hoogle
+import IHaskell.Eval.Util
 
 import Paths_ihaskell (version)
 import Data.Version (versionBranch)
@@ -369,34 +370,6 @@ evalCommand _ (Directive SetExtension exts) state = wrapExecution state $ do
   case catMaybes results of
     [] -> return []
     errors -> return $ displayError $ intercalate "\n" errors
-  where
-    -- Set an extension and update flags.
-    -- Return Nothing on success. On failure, return an error message.
-    setExtension :: String -> Interpreter (Maybe ErrMsg)
-    setExtension ext = do
-      flags <- getSessionDynFlags
-      -- First, try to check if this flag matches any extension name.
-      let newFlags =
-            case find (flagMatches ext) xFlags of
-              Just (_, flag, _) -> Just $ xopt_set flags flag
-              -- If it doesn't match an extension name, try matching against
-              -- disabling an extension.
-              Nothing ->
-                case find (flagMatchesNo ext) xFlags of
-                  Just (_, flag, _) -> Just $ xopt_unset flags flag
-                  Nothing -> Nothing
-
-      -- Set the flag if we need to.
-      case newFlags of
-        Just flags -> setSessionDynFlags flags >> return Nothing
-        Nothing -> return $ Just $ "Could not parse extension name: " ++ ext
-
-    -- Check if a FlagSpec matches an extension name.
-    flagMatches ext (name, _, _) = ext == name
-
-    -- Check if a FlagSpec matches "No<ExtensionName>".
-    -- In that case, we disable the extension.
-    flagMatchesNo ext (name, _, _) = ext == "No"  ++ name
 
 evalCommand _ (Directive GetType expr) state = wrapExecution state $ do
   write $ "Type: " ++ expr
diff --git a/src/IHaskell/Eval/Parser.hs b/src/IHaskell/Eval/Parser.hs
index f4196501..d44d8107 100644
--- a/src/IHaskell/Eval/Parser.hs
+++ b/src/IHaskell/Eval/Parser.hs
@@ -33,6 +33,7 @@ import SrcLoc hiding (Located)
 import StringBuffer
 
 import Language.Haskell.GHC.Parser
+import IHaskell.Eval.Util
 
 -- | A block of code to be evaluated.
 -- Each block contains a single element - one declaration, statement,
@@ -84,10 +85,16 @@ parseString codeString = do
   let output = runParser flags parserModule codeString
   case output of
     Parsed {} -> return [Located 1 $ Module codeString]
-    Failure {} ->
+    Failure {} -> do
       -- Split input into chunks based on indentation.
-      let chunks = layoutChunks $ dropComments codeString in
-        joinFunctions <$> processChunks [] chunks
+      let chunks = layoutChunks $ dropComments codeString
+      result <- joinFunctions <$> processChunks [] chunks
+
+      -- Return to previous flags. When parsing, flags can be set to make
+      -- sure parsing works properly. But we don't want those flags to be
+      -- set during evaluation until the right time.
+      setSessionDynFlags flags
+      return result
   where
     parseChunk :: GhcMonad m => String -> LineNumber -> m (Located CodeBlock)
     parseChunk chunk line = Located line <$>
@@ -104,6 +111,7 @@ parseString codeString = do
         -- If we have more remaining, parse the current chunk and recurse.
         Located line chunk:remaining ->  do
           block <- parseChunk chunk line
+          activateParsingExtensions $ unloc block
           processChunks (block : accum) remaining
 
     -- Test wither a given chunk is a directive.
@@ -114,6 +122,10 @@ parseString codeString = do
     nlines :: String -> Int
     nlines = length . lines
 
+activateParsingExtensions :: GhcMonad m => CodeBlock -> m ()
+activateParsingExtensions (Directive SetExtension ext) = void $ setExtension ext
+activateParsingExtensions _ = return ()
+
 -- | Parse a single chunk of code, as indicated by the layout of the code.
 parseCodeChunk :: GhcMonad m => String -> LineNumber  -> m CodeBlock
 parseCodeChunk code startLine = do
diff --git a/src/IHaskell/Eval/Util.hs b/src/IHaskell/Eval/Util.hs
new file mode 100644
index 00000000..9b4d138d
--- /dev/null
+++ b/src/IHaskell/Eval/Util.hs
@@ -0,0 +1,48 @@
+module IHaskell.Eval.Util (
+  extensionFlag, setExtension,
+  ExtFlag(..),
+  ) where
+
+-- GHC imports.
+import GHC
+import GhcMonad
+import DynFlags
+
+import Data.List (find)
+
+data ExtFlag
+     = SetFlag   ExtensionFlag
+     | UnsetFlag ExtensionFlag
+
+extensionFlag :: String -> Maybe ExtFlag
+extensionFlag ext = 
+  case find (flagMatches ext) xFlags of
+    Just (_, flag, _) -> Just $ SetFlag flag
+    -- If it doesn't match an extension name, try matching against
+    -- disabling an extension.
+    Nothing ->
+      case find (flagMatchesNo ext) xFlags of
+        Just (_, flag, _) -> Just $ UnsetFlag flag
+        Nothing -> Nothing
+
+  where
+    -- Check if a FlagSpec matches an extension name.
+    flagMatches ext (name, _, _) = ext == name
+
+    -- Check if a FlagSpec matches "No<ExtensionName>".
+    -- In that case, we disable the extension.
+    flagMatchesNo ext (name, _, _) = ext == "No"  ++ name
+
+-- Set an extension and update flags.
+-- Return Nothing on success. On failure, return an error message.
+setExtension :: GhcMonad m => String -> m (Maybe String)
+setExtension ext = do
+  flags <- getSessionDynFlags
+  case extensionFlag ext of
+    Nothing -> return $ Just $ "Could not parse extension name: " ++ ext
+    Just flag -> do
+      setSessionDynFlags $ 
+        case flag of
+          SetFlag ghcFlag -> xopt_set flags ghcFlag
+          UnsetFlag ghcFlag -> xopt_unset flags ghcFlag
+      return Nothing