Understanding The Difference: Forbearance Vs Deferment

Are you confused about the difference between federal student loan forbearance and federal student loan deferment? Don’t worry! We’re here to help you. Both forbearance and deferment offer options to pause or lower your student loan payments. However, there is a crucial distinction between them: interest continues to accrue during forbearance. Additionally, there are some minor differences in eligibility and repayment terms for each option. In this blog, we will provide you with an in-depth understanding of the variances between forbearance and deferment. We will also guide you in choosing the most suitable option for your student loan payments. If you’ve been a college student at any point in the last 50 years, chances are you received a federal student loan. According to the Federal Reserve, four out of ten college attendees have relied on student loans for their education.¹ The federal government introduced the Federal Family Education Loan (FFEL) program in 1965 to provide insurance for student loans. Let’s dive into the two types of federal student loans: subsidized and unsubsidized.

Subsidized Loans

Subsidized Loans are specifically designed for undergraduate students who need financial assistance to cover tuition expenses beyond their expected family contribution, including grants and scholarships. The best part about these loans is that the government covers the interest while you’re enrolled as a full or part-time student, including grace periods when payments aren’t required.

Unsubsidized Loans

Unsubsidized loans, on the other hand, are not based on your financial needs. They are typically acquired by individuals with higher incomes or better credit scores. Although unsubsidized loans may be more expensive than subsidized loans, they can be a viable option for those who don’t qualify for subsidized loans due to their income. Unlike subsidized loans, neither the government nor the lender covers the interest on unsubsidized loans at any time. This means there’s no grace period during which the loan doesn’t accrue interest. To prevent larger payments over an extended period, it’s advisable to pay at least the monthly interest on unsubsidized loans. Repayment of federal student loans differs significantly from private student loans. It’s essential to understand these distinctions. In case you find yourself unable to make your federal student loan payments, there are options to consider, such as forbearance or deferment. Don’t worry, you’re not alone in facing this situation. As of August 2023, 61.2% of borrowers have their loans in forbearance.² The question is, what’s the difference between forbearance and deferment, and which option is right for you? Are you feeling overwhelmed by your student loan payments? We have good news for you! A loan deferment allows you to delay or reduce your monthly student loan payments, providing much-needed financial relief. It’s the perfect solution if you’re facing a cash shortage or have more pressing matters to attend to. With a deferment, you can pause your payments for up to three years. And here’s the best part – if you have a subsidized loan, the interest won’t accrue during this deferment period because the federal government covers it for you. However, for unsubsidized loans, interest will still accumulate but will only need to be paid once your regular payments resume. So why wait? Take advantage of loan deferment to ease your financial burden while you prioritize other important obligations. Don’t hesitate to reach out to us if you have any questions or need further assistance in navigating student loan deferment. We’re here to help you! Deferment can be a helpful status for those who need more time to pay off their student loans without forgiving any part of the loan balance. Here is some information about deferment that you may find useful:

Economic or Financial Hardship

If you are facing financial hardship and receiving benefits or assistance such as TANF or SNAP, you may qualify for this deferment. It can also apply if you work full-time below 150% of your state’s poverty guideline or if you work for a nonprofit organization that provides charitable assistance or serves the public.

Unemployment

If you are actively seeking full-time employment but unable to find it, you can apply for a deferment with your student loan servicer. This deferment may also apply if you are currently receiving unemployment benefits.

Graduate Fellowship

For those pursuing a graduate degree with a fellowship, such as doctoral or master’s degree students, this type of deferment can be applicable. It offers support for your academic journey.

In-School Deferment

If you are currently enrolled in an eligible college or career school, you may qualify for this deferment. Additionally, graduate or professional students who have received a Direct PLUS Loan may receive an additional six months of deferment after completing their studies.

Military Service and Post Active Duty

If you are serving in the military on active duty during times of war or national emergency, you may be eligible for a deferment. This deferment will end when you return to classes or 13 months after the end of your active duty, whichever comes first. Deferment can be a temporary solution for repayment issues. If your circumstances are temporary and preventing you from making payments, deferment may be a good option for you. If you’re facing challenges in repaying your loan for a long-term or permanent basis, it might be helpful to explore the option of forbearance. Similar to deferment, student loan forbearance allows you to temporarily halt your payments for an extended period. It provides borrowers with the opportunity to postpone their loans until after graduation or completion of a degree program. However, it’s important to note a significant difference between deferment and forbearance. Unlike deferred loans, the interest on loans in forbearance continues to accrue even if you’re unable to make payments. The government does not cover the interest during this time. It’s important to differentiate between deferment and forbearance as they have distinct characteristics. Forbearance, unlike deferment, does not have a set of universal criteria or eligibility requirements. The decision to grant forbearance ultimately rests with the loan servicer. Moreover, the government can also enforce forbearance as a requirement. An example of this is the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was implemented in 2020 to provide financial assistance to individuals impacted by the COVID-19 pandemic. This legislation also extended forbearance options for millions of federal student loans. It’s worth noting that COVID-19 laws generally do not cover private student loans for forbearance. Nonetheless, certain private lenders might offer forbearance options, but the specific terms may vary. If you are wondering whether deferment and forbearance will harm your credit, you can relax. The good news is that neither option will negatively impact your credit score. When your deferment request is approved by the lender, this information will be reported to the credit bureaus. However, it is important to understand that while the deferment is visible on your credit report, it won’t directly affect your credit scores. Despite not hurting your credit score, it’s worth noting that deferments and forbearances do have an impact. This is because regardless of your repayment status, your loan will continue to age and establish credit history. Plus, having a loan in deferment or forbearance without delinquency can actually help raise your credit score. Yes, you read that correctly – not making payments on a loan can actually boost your credit score! However, it is crucial to keep in mind that deferments and forbearance don’t completely start fresh. Any interest that has accumulated prior to the deferment will still be added to the loan balance. Additionally, any late payments that were previously reported to the credit bureaus before entering deferment will still be visible on your credit report. When it comes to managing your student loans, it’s important to consider whether deferment or forbearance is the right option for you. For those with subsidized federal student loans, deferment can be a great choice. With interest still being paid on those loans, you can easily resume making payments when the deferment period ends. However, if you have private or unsubsidized federal loans, deferment may come with high costs. On the other hand, choosing forbearance means that your loan will continue to accrue interest, making it more expensive in the long run than a deferred loan. However, using the money you would have used for loan payments to pay off smaller debts can be beneficial. Comparing the cost of taking out another loan, such as a personal loan or payday loan, forbearance might actually save you money overall.

What if you’re unable to make any payments at all?

If you’re facing financial hardship and cannot afford loan payments in the long term, deferment and forbearance may not be the best solutions. In such cases, income-driven repayment plans can offer affordable options, with payments as low as $0 for those who are unemployed or underemployed. It’s important to avoid defaulting on your loans, as this can have serious consequences. Once in default, neither deferment nor forbearance is available. To get your student loan back on track, you can explore options like debt consolidation and loan rehabilitation for federal loans. Private loans may require the assistance of a student loan lawyer, who can provide guidance on debt settlement or, in extreme cases, filing for bankruptcy.

Frequently Asked Questions: Student Loan Deferment vs. Forbearance

Thank you for visiting our FAQs page! Below, you’ll find answers to commonly asked questions about student loan deferment versus forbearance:

What is the difference between student loan deferment and forbearance?

Both options provide a temporary pause on your monthly loan payments. However, it’s important to note that deferment may not accrue interest on certain federal loans, such as subsidized and Perkins loans. On the other hand, forbearance will accrue interest on all types of loans.

How does refinancing my student loan affect my options for deferment or forbearance?

If you choose to refinance your student loan with a private lender, you may be able to secure a better interest rate. However, keep in mind that by doing so, you may lose federal benefits, including specific deferment and forbearance options. It’s always a good idea to check with your new loan servicer to explore available options and possibly negotiate your student loans.

Can I make interest-only payments during a forbearance period to manage the accrued interest?

During a forbearance period, it’s generally not required to make monthly payments. However, some borrowers opt to make interest-only payments to prevent their loan balance from increasing. To arrange interest-only payments, reach out to your loan servicer for guidance.

How does student loan deferment impact my loan balance over time?

During deferment, some federal loans, such as Perkins loans, may not accrue interest. This helps prevent your loan balance from growing. However, for unsubsidized loans, any accrued interest may be capitalized, leading to an increase in the total loan balance.

What’s the difference between mandatory forbearance and general forbearance?

Mandatory forbearance is granted if you meet specific criteria, such as serving in a medical internship or residency. On the other hand, general forbearance is more discretionary and is based on financial hardships or illness. However, it’s important to note that the loan servicer has the final say in approving general forbearance.

If I’m on an income-driven repayment plan and face economic hardship, should I consider loan deferment?

If you’re currently on an income-driven repayment plan and your monthly payments are already low or even $0 based on your income, it may be worth considering a loan deferment if you’re facing temporary hardships. However, it’s crucial to evaluate the pros and cons carefully, taking into consideration any accrued interest that may occur during the deferment period.

How does accrued interest impact my overall student loan costs after using deferment or forbearance?

Accrued interest can be capitalized, which means it’s added to the principal amount of your loan. Consequently, this can increase the total amount you owe, resulting in higher interest costs over the life of the loan. We hope these answers have helped clarify the differences and implications of student loan deferment and forbearance. Feel free to reach out to us with any further questions or concerns you may have! Dealing with student loan debt can be a challenge, but there are strategies available to help you pay it off without sacrificing other important aspects of your life. If you find yourself unable to make payments, deferment and forbearance are useful tools to manage your loans. However, it’s essential to carefully consider your options before making a decision, as advised by Pachyy. If you want to learn more about this topic, here are some references that you may find helpful:

1. Higher Education and Student Loans | The Federal Reserve
2. Student Loan Debt Statistics [2023]: Average + Total Debt | Educationdata.org
3. COVID-19 Emergency Relief and Federal Student Aid | Studentaid.gov
4. Unemployment Deferment Request | Studentaid.gov
5. PLUS Loans | Federal Student Aid
6. Student loan deferment allows you to temporarily stop making payments | Studentaid.gov
7. What Is Student Loan Deferment? Who Qualifies and How to Get It | Investopedia