What You Need to Know About Deferment and Forbearance

About 70% of college students in the U.S. graduate with student loan debt. So, if you feel like you’re struggling to pay off your loans, you truly aren’t alone. Collectively, Americans owe almost $1.5 trillion in student loans. It’s a huge national problem and for many, debt can feel like a pit that keeps getting deeper. Debt affects people for years and even decades after graduation and can make goals like purchasing a home or car seem out of reach. Proper management of debt is essential for leading the life you envision.

Unfortunately, many student loan borrowers don’t have a full understanding of all the options that are open to them. For example, under certain circumstances, deferment and forbearance can be available which allows people to temporarily postpone or reduce their payment amount. Sounds pretty good, doesn’t it?

Deferment and forbearance can be a huge help during an otherwise difficult time, but these opportunities are not offered automatically or out of the blue. Student loan borrowers need to reach out to their servicer or loan holder and apply for these opportunities when in a time of need. So, how do you know if deferment and forbearance are available to you? It can be intimidating and confusing to figure out if they are--or even if they are the best way to handle your debt.

To clarify, here are the basics of deferment and forbearance you should consider before making your debt repayment plan.

Deferment

If you meet certain criteria, deferment allows you to temporarily pause your required payments during a period of financial strain. This is a great option for borrowers—especially since the federal government may pay the interest on subsidized loans during an approved deferment. Types of financial strain that are considered to qualify for deferment of federal student loans include: unemployment, going back to school at least half time, actively serving in the military, national emergency, or actively serving in Peace Corps or AmeriCorps. Other circumstances are considered as well, so if you are really struggling, it might be worth completing an application for deferment.

What You Need to Know

• You can contact your student loan servicer to ask what options are available and how to apply for deferment.
• Deferment is your right as a federal student loan borrower. If you qualify, you can’t be denied this option.
• The number of times you can use this option is limited, so choose wisely when thinking about postponing your payments.
• Deferment does not decrease the amount you owe or reduce your interest rate.
• You might not be eligible for deferment, so explore all your repayment options and make a backup plan.
• Avoid deferring unsubsidized loans, if you can. Interest always accrues on unsubsidized loans, even in deferment. 

Forbearance

Another option that allows for a bit of flexibility in paying back your federal student loans is forbearance. Forbearance also allows student loan borrowers to delay their payments for a period of time. Unlike deferment, however, interest will still accrue on all your loans during the forbearance period and without assistance from the government. .. If interest payments aren’t made during forbearance, it will then be added to your principal balance(capitalized) and you'll pay interest on top of interest—increasing the amount you repay overall. . If you are struggling to pay interest amounts, this may not be the appropriate solution. If you have subsidized loans, you should consider applying for deferment first.

If you aren’t eligible for deferment, forbearance can be used for similar situations such as unemployment, natural disaster, further education, etc. Typically, forbearance is used as a short term option for people in these circumstances, whereas deferment is often--but not always-- used to address a longer-term situation since you may be able to save money on interest while in deferment. . Forbearance helps many people navigate tough financial situations and is a great option if you’re able to manage the interest payments. Forbearance can also help prevent borrowers from defaulting on their loans.

What You Need to Know

• You should consider applying for deferment first to avoid paying interest on your subsidized loans.
• Your lender or servicer will grant forbearance at their discretion.
• These options are limited, once you run out—you're out.
• Forbearance will not affect your credit score.
• Forbearance is a short term solution usually reserved for cases of financial hardship or illness.
• There can be downsides to entering into a forbearance agreement depending on your provider. Examples of these impacts can include: loss of incentives that could reduce your interest rate, potential difficulty when applying for private loans.
• Forbearance does not decrease the amount you owe or reduce your interest rate.
• You might not be eligible for forbearance, so explore all your repayment options and make a backup plan.

Conclusion

The plain truth is that paying back debt is tough, but it doesn’t have to be stressful and it doesn’t have to become a never ending pit. You don’t need to give up your dreams because you took on loans as a college student. The key to staying on track is to make a financial plan that works for your personal situation. This can be a combination of budgeting and working with your loan provider on a deferment or forbearance agreement. There is no one-size-fits-all answer for debt and everyone’s repayment plan will look a little different. Payment plans have a degree of flexibility that aims to make paying back debt as painless as possible, so take advantage of these options if your current situation isn’t working.