Introduction
Student loans are a significant financial burden for many individuals, and managing the repayment of these loans can be challenging, especially when life circumstances change unexpectedly. Whether due to illness, financial hardship, or other unforeseen circumstances, students and graduates may find themselves struggling to make regular payments. Fortunately, there are options available to provide temporary relief from student loan payments, two of the most common being deferment and forbearance. These provisions are designed to help borrowers avoid falling behind on payments while they deal with temporary financial difficulties. This article explores both deferment and forbearance, including how they work, the differences between them, eligibility criteria, and their long-term impact on borrowers.
Understanding Deferment and Forbearance
Both deferment and forbearance are forms of relief that temporarily pause or reduce student loan payments, but they differ in terms of eligibility, how interest is handled, and the specific circumstances under which they can be granted.
Deferment is a period during which a borrower is temporarily allowed to postpone making payments on federal student loans. Interest on some loans, like subsidized loans, is paid by the government during the deferment period, while on others, the borrower is responsible for the interest. Deferment can be granted under several specific circumstances, including enrollment in school, economic hardship, or active military duty. This option is typically available to borrowers who are experiencing temporary financial difficulties but are likely to be able to resume payments in the future.
Forbearance, on the other hand, is when a borrower temporarily stops making payments or reduces the monthly payment amount for a set period. Forbearance is typically granted to borrowers experiencing financial hardship or other challenges that make it difficult to make payments. Unlike deferment, borrowers are generally responsible for paying the interest on their loans during forbearance, even if the loan is a subsidized one. While forbearance can provide immediate relief, it may also lead to a higher overall loan balance due to the accumulation of interest during the forbearance period.
Both options offer a temporary reprieve from loan payments, but each has its own set of eligibility requirements, consequences, and considerations. Understanding these differences is crucial for borrowers in making an informed decision about which option is best for their specific financial situation.
Deferment: When Is It Available?
Deferment allows borrowers to temporarily pause their federal student loan payments. During this period, interest does not accrue on subsidized loans, and the borrower is not required to make payments. However, interest does continue to accumulate on unsubsidized loans, and the borrower may be responsible for paying this interest once the deferment period ends.
Eligibility for deferment depends on the type of loan a borrower has, as well as the borrower’s circumstances. The most common reasons for which deferment may be granted include:
- Enrolled in School: If a borrower is enrolled at least half-time in an eligible program at a qualifying school, they may be eligible for deferment. This allows the borrower to defer payments while they are focused on their studies.
- Economic Hardship: Borrowers who are experiencing financial difficulties and meet certain income requirements may qualify for deferment. This includes individuals who are receiving public assistance or who are in a low-income situation.
- Active Military Duty: Borrowers who are on active military duty may qualify for deferment, particularly if they are serving in a combat zone. This deferment may also apply to borrowers who are undergoing post-service recovery periods.
- Unemployment: If a borrower is unemployed and actively seeking work, they may be eligible for deferment. This applies to situations in which a borrower is unable to find full-time employment despite efforts to do so.
- Other Qualifying Circumstances: In some cases, borrowers may qualify for deferment due to other special circumstances, such as temporary disability or participation in certain government programs.
One of the key benefits of deferment is that it may allow borrowers to avoid falling into delinquency or default on their loans, which can have serious financial consequences. Additionally, the government pays the interest on subsidized loans during deferment, which can help prevent the loan balance from increasing during the deferment period.
However, it’s important to note that not all federal loans qualify for deferment. For example, Parent PLUS loans do not qualify for deferment unless the borrower meets certain conditions. Additionally, borrowers who are delinquent on their loans or who have defaulted on their loans may not be eligible for deferment until they have resolved their default status.
Forbearance: When Is It Available?
Forbearance offers temporary relief for borrowers who are struggling to make their student loan payments but do not qualify for deferment. During forbearance, borrowers can either temporarily stop making payments or reduce their monthly payment amount. Forbearance can be granted for a variety of reasons, including financial difficulties, illness, or other circumstances that make it hard for the borrower to make regular payments.
Eligibility for forbearance is generally more flexible than that for deferment, making it a good option for borrowers who are experiencing financial difficulty but do not meet the specific criteria for deferment. Common reasons for forbearance include:
- Financial Hardship: Borrowers who are experiencing significant financial strain due to factors such as job loss, illness, or family emergencies may qualify for forbearance.
- Health Issues: If a borrower is unable to work or manage their finances due to a medical condition, they may be eligible for forbearance. This is particularly relevant for borrowers who are temporarily unable to maintain steady employment.
- Changes in Employment: If a borrower experiences a sudden change in employment status, such as moving from full-time to part-time work or becoming unemployed, they may be granted forbearance.
- Other Situations: Forbearance may also be granted for other circumstances, such as serving in a national disaster area or facing temporary financial challenges that do not qualify for deferment.
Unlike deferment, interest continues to accrue on all federal loans during forbearance, including subsidized loans. This means that borrowers who use forbearance may see their loan balances increase, as the interest will be added to the principal of the loan. As a result, while forbearance provides immediate relief, it may not be the best option for long-term financial stability.
There are two types of forbearance:
- General Forbearance: This is granted by the loan servicer and is available for borrowers who are facing financial difficulty, illness, or other circumstances. Borrowers who request general forbearance must explain their situation and provide documentation, such as proof of income or medical records, to justify the need for relief.
- Mandatory Forbearance: This is granted under specific circumstances and applies to certain groups of borrowers, such as teachers, AmeriCorps participants, or active-duty military members. Unlike general forbearance, mandatory forbearance must be granted if the borrower meets the eligibility criteria.
Key Differences Between Deferment and Forbearance
While deferment and forbearance both provide temporary relief from student loan payments, there are important differences between the two. Understanding these differences can help borrowers choose the best option for their financial situation.
- Interest Accrual: One of the most significant differences between deferment and forbearance is how interest is handled. During deferment, the government pays the interest on subsidized loans, which means the borrower is not responsible for paying the interest. However, during forbearance, the borrower is responsible for paying all the interest that accrues, even on subsidized loans.
- Eligibility: The eligibility criteria for deferment are generally more specific and may require certain circumstances, such as being enrolled in school or facing economic hardship. Forbearance, on the other hand, is generally more flexible and can be granted for a wider range of circumstances, though interest still accrues.
- Duration: Deferment typically has a set period during which it is available (e.g., as long as the borrower is in school or experiencing a specific hardship). Forbearance can be granted for up to 12 months at a time, and borrowers can request it multiple times, depending on their circumstances.
- Impact on Loan Balance: Deferment may have less impact on the borrower’s loan balance, as interest is paid by the government on subsidized loans. However, forbearance often leads to an increased loan balance, as the borrower is responsible for paying interest on all loans during the forbearance period.
The Long-Term Impact of Deferment and Forbearance
While deferment and forbearance can provide immediate relief from student loan payments, they are not long-term solutions. Borrowers should carefully consider the long-term impact of using these options before relying on them for extended periods.
Both deferment and forbearance can delay a borrower’s path to full repayment, which may ultimately lead to higher interest payments and a longer repayment term. This can make it more difficult for borrowers to pay off their loans in the future. Additionally, borrowers should be aware that interest will continue to accrue during forbearance, which can increase the total amount they owe.
Moreover, borrowers should understand that repeatedly using deferment or forbearance can negatively affect their credit if they do not make timely payments when the deferment or forbearance period ends. It is important to resume payments as soon as possible to avoid falling into delinquency or default.
Conclusion
Deferment and forbearance provide crucial temporary relief for borrowers facing financial difficulties, but it is important to understand the potential drawbacks of these options. While they can prevent a borrower from falling behind on their student loan payments, they can also lead to a higher loan balance due to the accrual of interest.
Ultimately, the decision to use deferment or forbearance depends on the borrower’s specific financial situation. Borrowers should consider their long-term financial goals, explore other options such as income-driven repayment plans, and communicate with their loan servicer to ensure that they make the best decision for their unique circumstances.
In any case, it is essential to stay informed about the implications of deferment and forbearance, and borrowers should always make every effort to resume payments as soon as they are able to ensure they do not accumulate more debt.
