Deferment vs Forbearance: What is the Best Way to Pause your Student Loan Payments?
Student loans account for $1.5 trillion of debt with more than 44 million Americans owing money, making it the second-largest debt held in the US after mortgage debt. The average borrower graduates with more than $37,000 in debt, and more than 30% are struggling to keep up with payments six years after graduation. Not everyone can secure a stable job after graduation, and even if you have, your salary may not be as high as you expected. You may go into active duty or go back to graduate school. Many are the reasons to fall behind on your student loans, and unless you keep making payments - the interest will continue to accrue. So it comes as no surprise that many are trying to pause their student loan payments through deferment or forbearance.
Deferment and forbearance explained
When a borrower meets certain criteria she or he may be eligible for student loan deferment or forbearance, which means that they can stop making payments for a fixed period of time. This can be especially helpful when the borrower is going through financial hardships. By pausing their student loan payments they can allocate that money to cover other immediate expenses. Additionally, pausing the payments will help the borrower avoid defaulting on their loan if they are not able to pay for it.
The main difference between deferment and forbearance is that you may not be responsible for paying the accrued interest on deferred student loans if you have subsidized federal loans or Perkins Loans - while on the other hand, you are responsible for paying interest on student loan forbearance, regardless of the loan type. They also differ on the duration of the on-hold period, student loan deferment can last up to three years, while student loan forbearance can last up to 12 months.
Student loan deferment
If you have subsidized federal loans or Perkins Loans, the deferment period will be interest-free because the government will pay for your accrued interest. However, if your loans are unsubsidized you will be responsible for covering the interest accrued on your debt. This can be dangerous because you risk to end up paying a higher amount than originally signed.
Student loan forbearance
During forbearance you will be responsible for paying the interest that builds up on your debt, regardless of the type of loan. Student loan forbearance can be especially useful if you are going through a short-term difficulty and need to get out of a tough spot. You are allowed to make interest-only payments during this period - should you wish to avoid interest accumulating on your balance. When the forbearance period is over you can apply for a renewal.
How you can qualify
To qualify for deferment you must meet one of the following criteria:
- You are enrolled at least half-time at an eligible college or career school.
- You are enrolled in an approved graduate fellowship program.
- You are enrolled in an approved rehabilitation training program for the disabled.
- You are a parent who received a Direct PLUS Loan or a FFEL PLUS Loan, while the student for whom you obtained the loan is enrolled at least half-time at an eligible college or career school.
- You are unemployed or unable to find full-time employment.
- You are experiencing economic hardship or serving in the Peace Corps.
- You are on active duty military service.
- You were on active duty military service in connection with a war, military operation, or national emergency; for the 13 months afterwards, or until you return to college on at least a half-time basis, whichever is earlier.
There are two types of forbearance: mandatory and discretionary.
Under mandatory forbearance, your loan servicer is required to grant you a forbearance period if you meet one of the following criteria:
- You are serving in a medical or dental internship or residency program.
- The total amount on your monthly payments for all your student loans is 20 percent or more of your total monthly gross income.
- You are serving in an AmeriCorps position for which you received a national service award.
- You are performing teaching service that would qualify you for teacher loan forgiveness.
- You qualify for partial repayment of your loans under the U.S. Department of Defense Student Loan Repayment Program.
- You are a member of the National Guard.
In this case, the loan servicer will decide whether or not you qualify for forbearance. Discretionary forbearance is also known as general forbearance.
You can apply for general forbearance if you are not able to meet your monthly payments due to:
- Financial difficulties
- Medical expenses
- Change in employment
- Other reasons acceptable to your loan servicer
How it can affect you
Entering into deferment or forbearance will not negatively impact your credit score, but it will be noted on your credit report. You should keep making payments until you receive approval, otherwise if you miss a payment you may risk entering default on your loans and hurting your credit.
You must also take into account that since interest continues to build up on your balance, you may end up paying thousands more in debt once the deferment period is over - unless you had student loan deferment on subsidized federal loans or Perkins Loans.
It is for this reason that you must weigh in all your options when faced with the decision of whether or not you should pause your student loan payments, and you should take the capitalized interest into account when weighing your options.
Determine If Pausing Student Loan Payments Is Right for You
If you are going through a financial crisis or a short-term emergency and you need to allocate money to other urgent expenses, requesting deferment or forbearance is a good way to stop making student loan payments and use that money to cover more important expenses while avoiding entering default on your loans.
If you expect the financial hardships to be for a long-term, you should consider switching to an income-driven repayment plan.
Learn more about income-driven repayment plans here.