Discover the disparities between deferment and forbearance options for student loans. Learn which choice suits your situation best and determine how they affect interest accrual. Explore alternatives and repayment options for federal and private loans.
Which Payment Pause Is Better?
Postponing student loan payments when you cannot afford them can be achieved through deferment or forbearance. While both options provide temporary relief, there are significant differences to consider. Deferment may be interest-free for certain federal loans, while forbearance always increases the amount owed.
Choosing between deferment and forbearance depends on your specific circumstances. Deferment is generally a better option if you have subsidized federal student loans or Perkins loans and are unemployed or experiencing significant financial hardship. Conversely, forbearance is preferable when you don’t qualify for deferment, and your financial challenges are temporary.
However, it’s important to note that neither deferment nor forbearance should be considered long-term solutions. If you don’t anticipate an improvement in your financial situation, it’s advisable to enroll in an income-driven repayment plan instead of pausing repayment.
Differences between Deferment and Forbearance for Federal Student Loans:
Deferment:
- Length: Varies depending on the type of deferment, ranging from three years to as long as you qualify.
- Qualifications: Tied to specific events such as unemployment or being enrolled in school at least half-time.
- Application Process: Different deferments require different forms, which should be submitted along with any necessary documentation to your student loan servicer.
- Interest Accrual: Subsidized federal student loans and Perkins loans do not accrue interest during deferment.
- Availability: If you meet the eligibility criteria and have available deferment time, your servicer must grant you a deferment.
- Credit Impact: Student loan deferment has no impact on your credit score.
Forbearance:
- Length: Limited to 12 months, with no set maximum for most federal loans.
- Qualifications: A specific qualifying event is usually not necessary.
- Application Process: There is a single “general forbearance” form; some servicers may also grant forbearance over the phone.
- Interest Accrual: Interest accrues on all loans during forbearance.
- Availability: It’s typically at your servicer’s discretion whether to grant you forbearance, although forbearance is sometimes mandatory.
- Credit Impact: Student loan forbearance has no impact on your credit score.
To determine the type of federal student loans you have, log in to your studentaid.gov account and look for loans labeled as “Perkins“ or “subsidized,” as these won’t accrue interest during deferment. Both deferment and forbearance can be retroactively applied if you’ve missed payments, but your loans haven’t defaulted yet, allowing you to catch up.
Choosing between Deferment and Forbearance:
If you need to pause payments temporarily, student loan deferment is generally the better option compared to forbearance, but you must qualify for deferment. Qualifying events for deferment include attending school at least half-time, being unemployed, receiving state or federal assistance, having a monthly income below 150% of your state’s poverty guidelines, being on active military duty or in the Peace Corps, or undergoing cancer treatment. Deferment is also beneficial if you have subsidized federal student loans or Perkins loans since these loans won’t accrue interest during the deferment period.
If you don’t qualify for deferment and your financial challenges are expected to be temporary, forbearance may be more suitable. For example, if you’re facing unexpected medical expenses and don’t have sufficient funds to cover them now but expect to in the near future, placing your loans in forbearance allows you to allocate the money from your student loan payment towards other bills and resume repayment later. Despite the additional interest costs, forbearance is often more affordable than alternatives like payday or personal loans.
Deferment and Forbearance for Private Student Loans:
Most private lenders offer deferment programs for specific situations, such as military service or enrollment in school. Forbearance options from private lenders typically extend for at least 12 months. However, regardless of the name (deferment or forbearance), the impact on private student loans remains the same: interest continues to accrue, and you are responsible for paying it. If your lender allows you to make interest payments while in school, it’s advisable to do so to prevent interest from growing substantially.
If you can’t afford your private student loans and your lender doesn’t provide deferment or forbearance options, it’s recommended to contact them and explain your situation. Your lender may be willing to offer temporary relief, such as allowing you to make interest-only payments or reducing your interest rate temporarily.
Considering Income-Driven Repayment
If your inability to afford federal student loan payments is a long-term issue, applying for an income-driven repayment plan is a better alternative to deferment or forbearance. Income-driven plans adjust your monthly payments based on your earnings, potentially allowing payments as low as $0 if you’re unemployed or underemployed. While paying less may cause interest to accumulate, income-driven repayment offers the added benefit of loan forgiveness after 20 or 25 years of repayment, depending on the plan.
Repayment Options for Defaulted Federal and Private Loans:
Once federal student loans enter default, options such as income-driven repayment, deferment, and forbearance are no longer available. However, you can rehabilitate defaulted federal loans or consolidate them to restore good standing. On the other hand, private loans have more limited recovery options when they default. In such cases, it may be necessary to consult a student loan lawyer to explore options like student loan settlement or potentially filing for bankruptcy if full repayment is not feasible. A lawyer can also help determine if the statute of limitations on your student loans has expired, eliminating the possibility of being sued for overdue debt.
