You have completed school and are beginning to get notices to pay your student loans, but you may not be in the best financial position yet.
You may still be in the process of applying for jobs in your field. You may be working a part-time job or completing an unpaid internship. You may be in the process of applying to graduate school and not currently working. You may have fallen on hard economic times for other personal reasons a few years into paying your student loans.
Deferment vs. Forbearance: Very Similar Forms of Financial Aid for Student Loans
Fortunately, both the Department of Education and private student loan companies understand that, even with a grace period, it can be tough for many new graduates to start repaying their loans. There are several solutions, including forbearance and deferment.
These are options that allow you to temporarily stop paying part or all of the monthly payments on the principal of your student loan. The minor differences in deferment versus forbearance are based on how tough your economic struggles are.
Under certain circumstances, you can apply for forbearance or deferment of your loans, which allow you to stop making monthly payments so you can focus on regaining your personal financial stability. These are important options for thousands of people in the United States, who may otherwise default on their loans simply because they experience times when they cannot pay the principal and interest on their loans.
Student Loan Deferment Compared to Forbearance
Although deferment and forbearance offer very similar benefits, there are some differences.
The main difference between the two is that deferment on some loans allows you to stop paying interest that accrues during your deferment period. Forbearance may require you to pay monthly interest, even if you do not pay on the principal amount. Deferment is generally considered better than forbearance because of this change in how interest works.
In considering deferment versus forbearance, you should first weigh how long you may struggle with money. If you think your financial hardship will last for three years or more, deferment is a better option because some forms can apply as long as you qualify and keep in touch with your loan officer. However, you need a qualifying event for deferment, like being unemployed or being a half-time student.
When you receive a deferment on some loans, you do not have to pay interest as it accrues. These loans include:
- Direct subsidized loans
- Subsidized federal Stafford loans
- Federal Perkins loans
- The portion of direct consolidated loans that is subsidized
- The portion of Federal Family Education Loans (FFEL) that is subsidized
You can apply for deferment on some federal loans but still be required to pay interest each month as it accrues. These loans include:
- Direct unsubsidized loans
- Unsubsidized federal Stafford loans
- Direct Plus loans
- FFEL Plus loans
- The unsubsidized part of direct consolidated loans and FFEL consolidated loans
Many federal and some private loans go into deferment automatically if you are still attending a college, university, or professional school at least half time. The lender understands that you cannot pay more than the interest each month while you focus on graduation.
Unsubsidized and private student loans continue to accrue interest while you are in deferment. Only subsidized federal loans allow interest accruement to stop.
Forbearance May Be Simpler Than Deferment
There are two basic types of forbearance.
- Mandatory: If you meet very specific criteria and request mandatory forbearance, your loan officer is required to grant it. These specific criteria include:
- You have a medical or dental residency or internship
- The total amount you owe each month is 20% or more of your total monthly gross income
- Your annual income is 150% below your state’s poverty line
- You are serving in a position with AmeriCorps and have received a national service award
- You are working in a teaching position that qualifies you for loan forgiveness
- You are serving in the military and would have your loan partially forgiven
- You are a member of the National Guard and have been activated by the governor, but you are not eligible for military deferment
- General: Sometimes called discretionary forbearance, this is a general request to your lender to stop paying or reduce monthly payments for a certain amount of time. You may be temporarily unable to make payments due to medical expenses, changes in employment, or other causes of financial difficulty.
The loan officer will determine if you can be granted this type of forbearance, and you may receive a forbearance period of up to 12 months. If you still struggle financially at the end of the forbearance period, you can apply for another general forbearance, and the loan officer will decide how long you can continue this process.
Only Perkins loans have a specific limit on forbearance periods, which is no more than three years.
While neither form allows you to maintain forbearance for more than a year at a time, you do not need specific qualifying events, like losing your job, for general forbearance. This is a boon for many people who experience a sudden economic hardship and need immediate relief in their monthly bills.
If you receive forbearance, you may be able to lower your monthly payments or stop paying on the principal for several months, but you will still be required to pay interest. However, with forbearance or some types of deferment, you can choose how your interest will be managed. Your two options are:
- Monthly payments. Even if you do not have to pay anything on your principal, you can choose to pay interest as it accrues each month. This will be a much smaller payment than your original student loan payments and can be more manageable for those struggling with income.
- Capitalize the interest. If you cannot even pay just the interest rate each month during forbearance, you can have the interest added to your principal and begin paying monthly installments with the new amount once the forbearance period ends. However, this will mean you pay more money, including more interest.
Both Deferment and Forbearance Are Temporary Options During Hardship
Deferment and forbearance do not occur automatically. If you hit a rough patch with your finances or income, you need to talk to your lender or school’s administrative office about how to apply.
For either forbearance or deferment, you may need to show the loan officer documentation about your income or financial status, although some forms of forbearance do not require much additional information outside of filling out a form. Neither will impact your credit score, so you can still apply for future student loans, mortgages, or car loans when you are ready.
When considering deferment versus forbearance, you should know that neither is a good long-term solution to student loan payments. They are both intended as short-term ways of preventing you from suffering. If you think your financial hardship will last longer, you should consider options like forgiveness or an income-driven repayment plan. Some private loans also have hardship options, like reduced payment assistance or payment extension plans.
You may consider refinancing your private and federal loans. Consolidating your federal loans is an option, so you make only one monthly payment and get a lower interest rate.
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