Student loan borrowers struggling to make payments should compare these solutions when seeking relief.
Deferment and forbearance are options for qualifying borrowers who want to avoid defaulting on their federal student loans. Since student loan debt is difficult to get discharged – even in bankruptcy – it’s best to work with your student loan servicer or lender to keep your loan in good standing during tough financial times, especially if you may want to refinance in the future, experts say.
In cases where an income-based repayment plan with lower or no monthly payments is an undesirable long-term option, deferment or forbearance may be a wise move, experts say.
“If you’re looking for more temporary payment relief, forbearance or deferment can be helpful short-term safety nets, so you don’t fall behind on your monthly payments,” says Michele Streeter Shepard, senior director of college affordability at The Institute for College Access and Success in Washington, D.C.
What Is Student Loan Deferment?
Deferment is a suspension of student loan payments. You can apply to get subsidized or unsubsidized federal student loan payments temporarily deferred, and the government pays the interest on the subsidized loans during deferment.
You will continue to accrue interest on unsubsidized loans even though you don’t have to make payments during the deferment period.
If you qualify for a deferment, such as being in school at least half time, you can access this benefit. During deferment, you may make interest payments if you are able.
“If the loan is not subsidized, I recommend that the borrower at least pay the interest on their loan if they enter deferment,” says Sravani Atluri, senior vice president at Edvisors, a Nevada-based company that provides advice on planning and paying for college. “Otherwise, that interest will accumulate and will be added to the loan principal once repayment begins. This will ultimately cost more, as the interest upon repayment will be based on the new higher principal – the principal at the time someone enters deferment or forbearance plus accrued interest.”
Types of Federal Student Loan Deferment
There are various types of deferment, including for situations when the borrower is in a qualifying school at least half time; in graduate school full time; in active duty or post-active duty military service; in an approved full-time disability rehabilitation program; undergoing cancer treatments; unemployed and looking for full-time work; experiencing economic hardship based on public assistance or earnings criteria; or in the standard six-month grace period after leaving school but before repayment begins, an option for most federal student loans.
You typically have to apply for a deferment and provide documentation that may be required for your specific type of deferment.
What Is Student Loan Forbearance?
Federal student loan forbearance suspends loan payments, similar to a deferment, or reduces them temporarily. Forbearance basically allows borrowers to skip loan payments without becoming delinquent, an important protection for someone facing temporary financial hardship.
However, misuse of forbearance through consecutive or long-term periods in forbearance goes against its purpose – to provide short-term relief. Interest continues to accumulate on loans in forbearance, including subsidized loans, unless you pay the interest during the forbearance period. When the forbearance ends, any accrued interest is added to the principal loan balance, and future interest is calculated based on the new, higher loan amount.
While the U.S. government offers forbearance programs to help federal student loan borrowers during hard economic times, the reprieves don’t allow progress toward Public Service Loan Forgiveness or loan cancellation under an income-driven repayment plan.
Forbearance is less common as a benefit of private student loans, but some private lenders offer it or other assistance to help borrowers get through difficult periods.
Types of Federal Student Loan Forbearance
There are several types of forbearance for federal student loans, including general or discretionary, mandatory and administrative.
General or discretionary forbearance
Student loan servicers may offer a general forbearance, also called a discretionary forbearance, to help a borrower repay a federal student loan if the servicer believes that the borrower is willing but currently unable to repay the loan.
For example, if the borrower intends to repay but is unable to make scheduled payments due to poor health, financial hardship, medical expenses, changes in employment or other acceptable reasons, the lender may approve a discretionary forbearance. The borrower can request it over the phone or in writing, and it can be used no more than 12 months at a time or three years total.
Mandatory forbearance
This form of relief, usually no more than 12 months at a time, must be granted when a borrower qualifies for any of the following reasons:
- A medical or dental internship or residency that meets specific requirements.
- Federal student loan payments that are 20% or more of the borrower’s total monthly gross income.
- Serving in a national service position, such as AmeriCorps.
- Eligible for partial loan repayment under the U.S. Department of Defense’s Student Loan Repayment Program.
- Teaching in a national need area or other position that would qualify for a federal teacher loan forgiveness program.
- A member of the National Guard who has been activated by a governor but is ineligible for a military deferment.
Administrative forbearance
This type of relief is granted for varying periods of time for different reasons, such as during a natural disaster, military mobilization, a local or national emergency, or other exceptional circumstances identified by the U.S. Department of Education.
An administrative forbearance may also be given during a certain transition period, such as if a borrower was wrongly granted a deferment or while a borrower is waiting for approval of a deferment, forbearance, repayment plan change or student loan consolidation.
The U.S. Department of Education may implement periods of administrative forbearance that apply to most or all federal student loan borrowers, notes Shelton W. Dotson IV, a financial advisor with Northwestern Mutual in Texas.
“This is the case with the coronavirus relief measures established in early 2020, which halted student loan payments and interest accrual” on most federal student loans, he says. “Basically, due to COVID-19 parameters, this time the loans won’t be accruing any interest.”
How to Choose Between Deferment and Forbearance
“Deferment or forbearance should be considered only in times of absolute necessity, because of the interest capitalization, but also because it may ultimately extend your repayment period,” Atluri says. “Borrowers should consider both these points when they begin repayment, whenever that may be, given they will now likely have higher payments for a longer period of time and to ensure that new payment is affordable. I recommend that you contact your servicer, who should be able to tell you what options you qualify for – deferment or forbearance.”
For subsidized federal student loans, Atluri recommends deferment rather than forbearance because the government will pay the interest during the deferment period.
Deferment is also a better option if you go back to school, experts say.
“There is an in-school deferment you can go into that pauses your payment. That’s really the main deferment,” says Meagan Landress, a certified student loan professional based in Atlanta. “Forbearance is something you can ask for from your loan servicer to pause payments if you’re out of school and in repayment.”
Those facing longer periods of financial hardship should consider enrolling in an income-based repayment plan, Shepard advises. “These plans can be more affordable than other plans since they base your payment on a percentage of your income.”
Deferment or forbearance may mean a longer repayment term in the long run, but either can be a lifeline for a struggling student loan borrower determined to avoid delinquency and default, experts say.
“If you just stopped making payments, that would not be good,” Landress says. “You would be going into default status, which is worse.”
