Student Loan Deferment vs Forbearance: Which to Choose

Deferment is the temporary suspension of loan payments for a period that can last up to three years. Students with federal loans (both subsidized and unsubsidized) can apply for deferment if they are unable to meet their monthly payment commitments of paying back their student loan. The government pays the interest accruing on subsidized student loans, while interest accruing on unsubsidized loans is added onto your total debt amount. 

There are various types of student loan deferment available for those who need it. Consider any one of the following options available:

Unemployment deferment
Borrowers with a Perkins loan may apply for deferment if they have been searching, but were unable to secure full-time employment. The loan deferment lasts up to three years, with an additional six months grace period.

Economic hardships deferment
This type of deferment is available for borrowers going through a hard economic time and are a) receiving government aid such as welfare or b) those with an income level below 150% of the federal poverty guidelines. The deferment period also lasts up to three years.

Graduate fellowship deferment 

This option for deferment is available for students enrolled in an approved post-graduate program, but is mainly targeted towards doctoral or masters’ students.

In-school deferment 

For borrowers who have Perkins loans, this deferment option comes through automatically. In-school deferment remains in place if the borrower is enrolled in school on a half-time basis as a minimum. This deferment lasts for as long as the borrower is in school and up to six months after graduation.

Cancer treatment deferment

Borrowers undergoing treatment for cancer can apply for this type of deferment. The time period can stay in place for as long as the borrower is undergoing treatment and up to six months after the completion of the treatment process.

Military service deferment

This deferment is for borrowers who are involved in active duty, military operations, or war. Military service deferment lasts for up to 13 months.

Rehabilitation training deferment 

Students who are enrolled in an approved rehabilitation center or for vocational training can apply for rehabilitation training deferment. This options includes borrowers who are admitted to mental hospitals and drug abuse rehabilitation institutions.

Parent PLUS borrower deferment

This is a deferment option that is available for parents who have taken out a student loan for their children. Parents qualify for this type of deferment provided that their child remains enrolled at school on a half-time basis as a minimum requirement.

Borrowers opt for student loan deferment for a number of reasons. Consider the following potential benefits and drawbacks:

Pros:

• The interest is subsidized
  The government pays for the interest rates that accrue during deferment for federally subsidized loans and Perkins loans.
• Financial relief
  Deferment frees up money, leaving room for you to cater to other pressing expenses that are equally important.
• Does not damage your credit score
  Instead of defaulting on your loans and consequently damaging your credit score, you can choose deferment because it doesn’t impact your credit score.

Cons 

• Increases the length of your loan
  The process of deferment increases the number of years that you are stuck with your student loan. This means that it may take a longer time for you to pay off your student debt.
• Interest may continue to grow
  For students with unsubsidized student loans, the interest on their loan will continue to grow. This interest is then added onto your initial loan balance, thus increasing the amount of your student loan.
• Stagnates your loan repayment process
  Putting a pause on loan payments stagnates your ability to live debt-free and focus on other financial obligations and achievements, meaning that you can live in debt for a longer period of time than you initially planned for.

To apply for deferment, it’s important to be aware of the eligibility criteria. Here are some of the most common requirements involved:

• Unemployment
• Going back to school- attending at least half-time basis
• Currently serving in the military service or up to six months after serving in the military
• Involvement in the Peace Corps
• Enrollment in an approved rehabilitation program
• Undergoing treatment for cancer
• Enrollment in an approved fellowship or internship program

The process of applying for student loan deferment includes the following steps:

1. Contact your loan servicer
   Financial advice on deferment will be provided by your loan servicer
2. Fill in the deferment form
   The form is accessed and filled in from the Federal Aid website.
3. Gather all your documentation
   The documentation should be supporting your situation
4. Submit the form and attach the documentation
   Ensure that the form is well filled in.
5. Do not stop making payments
   Only stop when your request for deferment is approved.
6. Resume payments:
   If your period for deferment is over, you can resume making payments.
7. Reapply
   If you need more time, reapply to have your deferment period extended.

Forbearance allows you to postpone making your payments for up to 12 months at a time. During the forbearance period, interest on your student loan still accrues and the interest is then added to your initial loan balance. In the event that you qualify for forbearance, you are given permission to stop making payments for up to three years on all your federal student loans. A forbearance is a good option for those who do not qualify for in-school deferment for reasons such as being enrolled on a less than half-time basis.

These are the two options of forbearance available.

General forbearance
In general, this type of forbearance is easy to qualify for. This is because the reason needs to be acceptable to the loan servicer, so a scenarios such as a financial crisis is likely to be accepted. The forbearance period is up to 12 months a time, and you can apply for a maximum of three years.

Mandatory forbearance
Mandatory forbearance is granted to all who qualify and request it. As long as you meet the necessary criteria, your loan servicer must offer you forbearance. Having said that, borrowers should be in specific situations such as in the military or AmeriCorps, and must first contact their loan servicer to request forbearance.

Borrowers opt for student loan forbearance for various reasons. Consider the following potential benefits and drawbacks before making your own decision:

Pros 

• Temporary relief
  Offers a very much-needed relief, helping you take a break from making monthly payments on your student loan during financial hardships. 
• Does not affect credit score
  Will not negatively affect your credit score 
• Gives you time to plan
  The pause gives you time to consider other repayment options and plans such as refinancing.

Cons 

• Accrued interest
  Interest accrues on your loan during forbearance and is added to your student loan.
• Only federal loans qualify
  Only available to borrowers with federal loans.
• Only a temporary relief
  Offers short-term relief and does not help to reduce your debt.

The eligibility criteria for most student loan forbearance can vary depending on the option you choose. Here are some of the most common requirements involved to be eligible for forbearance:

Financial challenges
These are challenges such as economic hardships and any loss of income.

Medical and health expenses
Medical bills and treatment for ailments may qualify you for forbearance.

Unemployment
The scenario of failing to secure a job after continuously seeking employment can make you eligible for forbearance.

Other service commitments that may be accepted by your loan servicer
These include volunteer work in AmeriCorps or active involvement in the military.

The process of applying for student loan forbearance includes the following steps:

1. Get in touch with your lender
   Contact your lender or servicer to let them know about your status and your inability to make payments.
2. Complete an application
   Fill in and complete a forbearance application form
3. Gather all supporting documents
   This will help to prove to the lender that you have a valid reason as to why you need to temporarily stop paying your debt.
4. Continue making regular payments
   Until your application is approved, do not stop making payments on your student loan.

The main difference between deferment and forbearance is boils down to interest and the time frame in which your loan payments are paused. While you are in forbearance, the interest accrues on your loan balance, whereas if you choose to go the route of deferment, your loan will remain the same – unless you have unsubsidized federal student loans. Deferment can last up to three years without having to reapply but with forbearance, you have to reapply every 12 months.

Factors to keep in mind:

Before making your final decision as to whether you will opt for student loan deferment or forbearance, use the following factors as a guide:

• The type of student loan that you have
• The length of the break you wish to take
• The eligibility requirements
• Your current financial or health situation

Both deferment and forbearance do not hurt your credit score. They do not impact it; but defaulting after the deferment and forbearance period is over does affect your credit score.

If you do not qualify for either deferment or forbearance, you can opt for the income-driven repayment plan, loan forgiveness, or refinancing.

Forbearance in student loans is the temporary pause put on loan payments. The interest accrues in forbearance and is added to your initial loan amount.

Both forbearance and deferment enables borrowers to temporarily stop making loan payments and postpone the whole process for up to 12 months for forbearance and up to three years for deferment. There are many reasons to opt for forbearance and deferment, and the eligibility criteria and steps of application tend to be similar. However, it’s important to note that only federal loans qualify for forbearance and deferment. Private student loan borrowers may not be eligible for either option. When choosing between forbearance and deferment, remember to consider your financial circumstances and the overall effect on your initial student debt. With this in mind, you’ll be well on your way to making the best possible decision for your financial situation.