It’s no secret that college tuition can be expensive. And for the millions of people who struggle with repaying student loans, sometimes you need a break from the bill. But what’s the difference between forbearance and deferment? And which one is right for you?
Anything from emergency expenses to unexpected loss of income can blow up your budget. And when your basic needs eat up your income, your student loan payments may go unpaid.
In the world of federal student loans, forbearance and deferment are both options for borrowers. These two terms are often interchangeable, but they do not mean the same thing. This blog will help you understand the difference between forbearance and deferment and how to pick the right one for you.
Federal Student Loans
If you have been a college student anytime during the past 50 years, chances are you received a federal student loan. The federal government began insuring student loans in 1965, creating the program that is now called the Federal Family Education Loan (FFEL) program.
There are two types of federal student loans: subsidized and unsubsidized.
Subsidized Loans are for undergraduate students to make up the difference between the cost of tuition and their expected family contribution (including other financial aid like grants and scholarships). The best part about these loans is that the government pays the interest as a full or part-time student in school. The coverage also extends across any grace periods where payments are not required.
Unsubsidized loans are loans that are not based on the borrower’s financial needs. This type of loan is typically obtained by those with higher incomes or higher credit scores. Unsubsidized loans may be more expensive than subsidized ones but may be of interest to those who can’t get a subsidized loan because they don’t have a low enough income.
The government or the lender does not cover unsubsidized loan interest at any time. That means there is no grace period when the loan is not accruing interest. Therefore, if you have an unsubsidized loan, it’s a good idea to pay at least the interest on the loan monthly to avoid larger payments over a long period.
No matter what type of student loan you have, there may come a time when you won’t be able to make your payments. This is when you may want to consider forbearance or deferment.
But, what’s the difference between the two? And, which one should you choose?
Student Loan Deferment
A loan deferment allows you to hold off paying your student loans or reduce the cost of your monthly payment. In addition, a deferment can provide relief if you are short on cash or need to emphasize more pressing matters. Typically, a borrower can be allowed to defer payments for up to three years.
Interest will not accrue on the loan for a subsidized loan since the federal government is paying it. On the other hand, unsubsidized loan interest does accrue. However, that interest is usually due whenever regular payments resume.
Types of Deferment
Deferment is a status that many people enter into when trying to get their student loans under control. It is helpful for those who need more time to pay back the total balance, but it does not forgive any portion of the loan.
Deferment doesn’t simply mean stopping payments. To defer a federal student loan, you must meet specific eligibility criteria and still have deferment time available in your lifetime limit. You can defer federal student loans only for so long.
Student loan deferment can come in many different forms:
You can qualify for this deferment if you are receiving benefits or assistance due to low income. For example, recipients of Temporary Assistance for Needy Families (TANF)—commonly referred to as welfare—are usually eligible. Economic hardship can also apply to borrowers who work full-time below 150% of their state’s poverty guideline. Poverty guidelines are determined in each state by your family size. So, if the poverty guideline for a family of four is $26,000, then an income of $39,750 or less would qualify for economic hardship.
You may also qualify if your low income is due to working for a nonprofit organization that provides charitable assistance or serves the public. For example, individuals serving in the Peace Corp are eligible.
If you’re looking for full-time employment but can’t find it, you may be eligible for a deferment. You can apply for this deferment if you receive unemployment benefits or are currently seeking full-time employment.
A graduate fellowship is an opportunity to gain the financial support you need to pursue a graduate degree and research. Fortunately, most graduate fellowships are available for doctoral students, but some are also available to master’s degree students. These fellowships are also qualifying conditions for a deferment.
You are eligible for this deferment if you’re currently enrolled in an eligible college or career school. If you’re a graduate or professional student who has received a Direct PLUS Loan, you qualify for an additional six months of deferment after you complete your studies. Suppose you are enrolled in an eligible college or career school at least half-time. In that case, your loan servicer will notify you that your loan has been placed into deferment, and they will automatically adjust the payments for you.
Military Service and Post Active Duty
Military personnel may be eligible for a deferment if they are on active duty in times of war or national emergency. Your deferment will end when you return to classes or 13 months after the end of your active duty, whichever comes first.
Deferment is a good solution for short-term repayment problems with your loan. If the circumstances stopping you from making payments are temporary, then deferment may be for you.
What Is Student Loan Forbearance?
If your inability to repay your loan is a long-term or permanent problem, you may want to consider forbearance.
Much like a deferment, student loan forbearance is a way for you to stop payments for an extended period. It is another way for borrowers to postpone loans until after graduation or completion of a degree program. However, there is a significant difference between deferment and forbearance. Unlike deferred loans, the government does not pay the interest on loans in forbearance. Those loans will continue to accrue interest, regardless of your inability to repay.
Qualifying For Forbearance
Deferment and forbearance are quite different. forbearance doesn’t follow any universal criteria or eligibility requirements. Ultimately, the decision to grant you a forbearance is up to the loan servicer.
The government can also require or mandate forbearance. For example, in 2020, the government passed the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide financial assistance to those financially affected by the COVID-19 pandemic. In addition, the legislation provided forbearance options for millions of federal student loans.
Private student loans do not typically qualify for forbearance under COVID-19 laws. However, some private lenders may offer forbearance, but the details are not standardized.
Do Deferment And Forbearance Hurt Your Credit?
While they have their differences, forbearance and deferment share one crucial factor: Neither option will damage your credit score. When a lender approves your deferment request, it should report that your payments are currently deferred to the credit bureaus. While this appears on your credit report, the deferment mark won’t directly help or hurt your credit scores.
Even though they won’t necessarily hurt your credit score, deferments and forbearances will affect it. This is because regardless of your repayment status, your loan will age and gain credit history. And since it won’t be delinquent, a loan with a deferment or forbearance can help raise your score.
That’s right. Not paying a loan can improve your credit!
It’s important to note that deferments and forbearance action will not wipe the slate completely clean. Any interest accrued before the deferment will remain attached to the balance of the loan. Late payments reported to the credit bureaus before entering deferment will be reflected on your credit report.
Choosing Between Deferment And Forbearance
For some people, student loan deferment is better than forbearance. Deferments are particularly good if you have subsidized federal student loans. Because the interest continues to be paid on those loans, you will be able to pick up right where you left off on your payments. But, if you have private or unsubsidized federal loans, deferment can be quite expensive.
Because it always accrues interest, a loan in forbearance will cost more than a deferred loan. But, putting money towards other things while you take a break from loan payments can help you pay off smaller debts. If you think about how much it would cost you to take out another personal loan (or even a payday loan) to do the same thing, forbearance may save you money overall.
What If You Can’t Pay At All?
If you can’t make long-term loan payments, deferment and forbearance may not be what you need. However, income-driven plans can make their student loan payments affordable for those struggling to make ends meet. Payments can be as small as $0 if you’re unemployed or underemployed.
If your loan goes completely unpaid, then you run the risk of going into default. Once in default, your loan can’t go into deferment or forbearance. Instead, you will need to get your student loan back to good standing, just like any other loan. Federal student loans have options like debt consolidation and loan rehabilitation. Private loans are best settled with the help of a student loan lawyer, who may advise a debt settlement or—in extreme cases—file for bankruptcy.
Student loan debt is a problem for many people. But, with the right management strategy, paying down your debt can happen without you forfeiting the other things in life that need space in your budget. Deferment and forbearance are tools that can help you manage your loans even when you can’t afford to pay them. If you should need them, be sure to weigh your options carefully.