Deferment vs. Forbearance — Know the difference, end student loan worry
College lasts for four years. Student loans last forever.
Or at least that’s the way it seems to many college graduates struggling to keep their head above water, seeking solutions to repay their student loans, or at least discover some school loan relief.
If you are wondering what the difference really is between deferment vs. forbearance, you are not alone.
These two terms tend to be interchanged frequently. But each has its own distinct meaning. Knowing their true meaning will help you choose the best option to help you postpone repaying student loan debt.
A student loan forbearance is an agreement between you (the borrower) and your lender to temporarily stop monthly payments coming due on your school loans. Forbearance may also extend the timeframe for making monthly payments, or even reduce the total number of monthly payments on a short-term basis. The downside of forbearance is that your loan accumulates interest; forbearance results in you having to pay more money than your original calculations on college borrowing costs over the long run.
Ultimately, you must pay off your student loans. Paying a higher total will cause pain then. But if you are without a job now, or you are engaged in an intense life-altering event, or you are attending advanced internship which will lead to enhanced employment prospects in the future, then forbearance may appeal to you.
Returning to student loan deferments: Your deferment refers to that specific period of time during which your student loan payments are postponed. Your loan is not cancelled the way a loan forgiveness agreement works.
The federal government student loan experts defines a ‘deferment’ of your college loans as follows:
A deferment is a temporary suspension of a borrower’s monthly loan payment. There are many different types of deferments available. During deferment of subsidized loans, principal payments are postponed and interest does not accrue.
During deferment of unsubsidized loans, principal payments are postponed but interest continues to accrue. Accrued unpaid interest will be added to the principal balance (a.k.a., “capitalized”) of the loan(s) at the end of the deferment period. This will increase the amounts borrowers owe.
Deferments must be applied for and documented with lots of paperwork. It is not an easy task; but if you are short on funds, filling out the paperwork may be the best investment of your time that you can make in your finances right now.
There are different types of deferments that college loan borrowers can apply to.
Deferment programs include: Serving in the military, attending graduate school, experiencing economic hardship (such as unemployment), and joining the Peace Corps — those are just a few of the options which abound when it comes to deferring your student loans. Search around and you are bound to find more.
Forbearance of your student loans can likely include: Americorps loan forbearance, internship or residency forbearance, teacher loan forgiveness forbearance, and related arenas.
The variety of forbearance and deferment options available to match your own unique circumstances have very distinct requirements every student loan borrower needs to keep in mind, such as whether or not the college loan is for federal forbearance and deferment, or if it is for private loans; each will carry different requirements and ‘dos and don’ts’ that are very important to follow.
Borrowers of private loans should directly contact their lender to find out what options are available to them.
The number of times loans can be placed in status of deferment or forbearance is limited, too.
For federal student loans, 36 months worth of deferment requests is the max you can tap into, but only in 6-12 month spurts. You are not allowed to defer loans for a straight 36 months (sorry!) Currently, there is no limit on the number of forbearances you can request. Again, keep in mind: private student loans have different rules. Contact your lender for details.
You are advised to plan in advance. Contact your lender at least 30 days before you need your deferment or your forbearance to begin. This will give your lender enough time to process your request. So don’t expect to start the process the same week that your next loan payment is due. You’ll be late making the payment, and you’ll experience nothing but frustration. Plan ahead.
Here is the rule of thumb regarding how interest is handled:
SUBSIDIZED loans do not accrue interest.
UNSUBSIDIZED loans do accrue interest.
Re: any concerns about paying interest during a deferment or forbearance:
For subsidized federal loans, the government pays the interest that accumulates during your deferment or forbearance period. For unsubsidized loans, however, interest that you agreed to when you took out your student loan accrues during the deferment period.
If this seems to be a problem to you, then you will very likely have the option to pay down on the interest while you are still attending school and enjoy the benefits of your deferment or forbearance. Or else, you can choose to add the interest to the total principal borrowed to help you attend college at the back end (presumably when you are earning more money and can afford to pay for that extra pile of interest).
Private loans have their own rules. Call or visit the website of your lender to determine all the many details on how interest is handled during deferment or forbearance time frames that you enter into.
You must also take caution of consolidating loans; some programs prevent you from deferring student loan payments if you have previously consolidated them. Be careful. Ask lots of questions.
Example of student loan rules that might affect you in certain circumstances: If you are repaying under the Income-Based Repayment (IBR) Plan and have a partial financial hardship when a deferment ends, interest accrued during deferment will not be capitalized until after your partial financial hardship ends or you leave the IBR Plan. (source: ed.gov)
Here are other helpful links we recommend that can help you learn more about student loan repayment options:
Forbearance and deferment are two options a student loan borrower should definitely consider when he or she cannot repay student loans. Missing loan payments is a sure-fire path to destroying your credit score, and a low credit score is becoming a sure-fire way to not be offered a good job upon graduation from college. Employers increasingly pull your credit score when considering hiring you. Beware of bad credit scores!
Forbearance allows interest payments to add up and then get applied to the loan’s principle and interest later on; while this will definitely increase your college borrowing costs, often this option suits a borrower best. Loan deferment has the beneficial side effect of not accumulating during deferment, and payments plus interest gets suspended for 6 – 12 months at a time.
Forbearance reportedly has proven easier to qualify for than has deferment. But it all depends on individual circumstances, income, past credit history and the like.
Deferment does not excuse a student borrower from attending their accredited school and completing school coursework; forbearance, on the other hand, can allow the borrower to leave school without violating terms of the origina student loan.
Military service loan deferment options are available. Each lender usually outlines their own specific guidelines to offer relief to those serving on active or qualifying National Guard duty during (1) wartime, (2) other military operation, or (3) national emergency.
If you are serving on active duty in the military, ask your lender if you have now become eligible for benefits under Service Member Civil Relief Act on FFELP (Federal Family Education Loan Program) loans obtained prior to you reporting for active duty. Maximum interest rates allowed on eligible loans is minimal during periods of service, and remains in effect until active duty is completed.