When it comes to managing student loan repayment, many borrowers may face situations where they are unable to make their monthly payments. In such cases, deferment and forbearance are two options that allow borrowers to temporarily postpone or reduce their payments. However, understanding the key differences between deferment and forbearance is essential, as each option has different eligibility requirements, terms, and implications. This article will help clarify these two terms and guide you in making an informed decision about which option is best suited to your situation.
What is Deferment?
Deferment is a temporary suspension of loan payments that is granted for specific circumstances. During a deferment period, the borrower may not be required to make any payments on their student loans. There are certain types of loans, such as federal student loans, that allow borrowers to request deferment under specific conditions.
In most cases, deferment is available to both federal and private loan borrowers, though the specific eligibility requirements may differ. Deferment allows you to temporarily stop making payments, which can be helpful if you’re facing financial hardships, continuing your education, or experiencing other qualifying life circumstances.
Types of Deferment
For federal student loans, there are several types of deferment available. Some of the most common reasons for requesting deferment include:
- In-school deferment: If you are enrolled at least half-time in an eligible postsecondary school, you can request to defer your student loans.
- Unemployment deferment: If you are unemployed or underemployed, you may be eligible for deferment while you look for a job.
- Economic hardship deferment: If you’re experiencing financial hardship and meet specific criteria, you may be eligible for a deferment.
- Military deferment: If you are an active-duty military service member, you may qualify for deferment during your service.
Key Features of Deferment
- No payment required: In most cases, no payments are due during the deferment period, which can ease your financial burden.
- Interest on subsidized loans: For subsidized federal loans, the government may pay the interest during deferment, meaning that your loan balance won’t increase. However, unsubsidized loans will continue to accrue interest during deferment, and you will be responsible for paying that interest.
- Automatic approval for certain conditions: Some forms of deferment, like in-school deferment, are typically granted automatically if you meet the eligibility criteria.
What is Forbearance?
Forbearance is another option for temporarily postponing or reducing your loan payments, but it differs from deferment in key ways. Forbearance is generally granted when you are unable to make your monthly payments due to financial difficulties, health issues, or other reasons. Unlike deferment, forbearance is typically a discretionary option, meaning the loan servicer must approve it, and it is not automatically granted under certain circumstances.
Types of Forbearance
There are two main types of forbearance available for federal student loans:
- General forbearance (discretionary): This type of forbearance is granted at the discretion of the loan servicer and is typically used if you are experiencing financial difficulties, illness, or other personal issues.
- Mandatory forbearance: This type of forbearance must be granted if you meet specific eligibility criteria, such as serving in a medical or dental internship or residency program, or if you are a member of the National Guard who is activated for service.
Key Features of Forbearance
- Optional payment reduction or suspension: Depending on the type of forbearance, your payments may be temporarily suspended, or reduced to a lower amount for a period of time.
- Interest continues to accrue: Unlike deferment, interest continues to accrue during forbearance, even if your payments are suspended. This means that your loan balance will increase over time if you do not make payments on the interest.
- Available for both federal and private loans: Forbearance is generally available for both federal and private loans, although private lenders may have different criteria and terms.
Key Differences Between Deferment and Forbearance
While both deferment and forbearance allow borrowers to temporarily postpone or reduce payments, there are several key differences between the two options. Understanding these differences is crucial to determining which option is right for you.
Eligibility
- Deferment: Deferment is available under specific circumstances, such as enrollment in school, financial hardship, or active military service. You must meet the eligibility requirements outlined by your loan servicer to qualify.
- Forbearance: Forbearance is typically granted due to financial hardship or personal situations, but it is at the discretion of your loan servicer. Forbearance is not automatically granted like deferment.
Interest Accrual
- Deferment: Interest on subsidized federal loans is typically paid by the government during deferment. However, interest on unsubsidized loans will continue to accrue, and you will be responsible for paying that interest.
- Forbearance: Interest continues to accrue during forbearance, regardless of whether you have subsidized or unsubsidized loans. This can increase the overall cost of your loan over time.
Automatic vs. Discretionary Approval
- Deferment: Some types of deferment, such as in-school deferment, are automatically granted if you meet the eligibility requirements.
- Forbearance: Forbearance is generally discretionary and requires approval from your loan servicer. In some cases, forbearance may not be granted, depending on your situation.
Impact on Loan Balance
- Deferment: For subsidized loans, the government covers the interest during the deferment period, preventing your loan balance from increasing. However, for unsubsidized loans, interest continues to accumulate, increasing the total loan balance.
- Forbearance: Interest accrues on all loans during forbearance, including subsidized loans, meaning that your loan balance will increase over time if you do not pay the interest.
When Should You Choose Deferment?
Deferment may be a better option if you qualify for specific circumstances, such as enrolling in school or experiencing economic hardship. It is also the preferred choice for borrowers with subsidized federal loans, as the government may pay the interest during deferment. However, if you have unsubsidized loans, you should carefully consider whether deferment is the right choice for you, as the interest will continue to accrue.
When Should You Choose Forbearance?
Forbearance may be the better option if you are experiencing financial hardship but do not meet the specific criteria for deferment, or if you are unable to continue making payments due to personal reasons. However, because interest continues to accrue during forbearance, it is essential to weigh the potential impact on your loan balance. If possible, consider making at least partial payments on the interest during forbearance to minimize the increase in your loan balance.
Conclusion
Both deferment and forbearance offer temporary relief from student loan payments, but they differ in important ways. Deferment is generally a more favorable option, as interest may be covered by the government for subsidized loans. On the other hand, forbearance gives you more flexibility, though it comes with the downside of continued interest accrual.
Before choosing either option, make sure to carefully evaluate your situation, your loan type, and the long-term impact on your finances. By understanding the differences and selecting the option that best fits your needs, you can make an informed decision that helps you manage your student loan debt effectively.