Student Loan Deferment and Forbearance: What’s the Difference?
Students who need a financial break may qualify for a deferment or forbearance to keep their credit in good standing without having to default on their loans. Lenders and the U.S. Department of Education have put options in place that grant a temporary stay on loan payments or reduce the monthly amount the indebted student needs to pay.
Student Loan Deferment vs. Forbearance
The key financial difference between a deferment and loan forbearance is whether the qualified student needs to pay interest following the break. With a deferment on certain loans, the interest generated during the temporary break does not need to be repaid. With a forbearance, the student is required to repay all interest on all federal loans. In many cases, a deferment is the more preferable option.
An extended duration during which the student loan payments are put on hold while the individual completes school or serves a stint in the military. Other extenuating circumstances may also be used to delay payments. Interest may be dismissed for subsidized student loans.
A halt in payments necessitated by personal hardship – for less time than allowed for deferments. Typically these are granted for extended illness or financial adversity. Interest repayment may be required.
Deferments and forbearance are not automatically granted; students need to apply for them by submitting a request to their loan servicers. Loans may also be discharged or forgiven for graduates working in designated public service or teaching positions.
Student Loan Deferment: Federal Loans
The U.S. Department of Education has established requirements for students seeking a deferment of federal loans. To qualify, applicants must be one or more of the following:
- Enrolled at least half-time in a college or career school
- Enrolled in an approved graduate fellowship program
- Disabled and enrolled in an approved rehabilitation training program
- Unemployed (up to three years)
- Earning less than 150% per month of the state’s poverty designation
- Serving in the Peace Corps (up to three years)
- On active military duty service
- Receiving state or federal financial assistance
- A parent with a Direct PLUS Loan or a FFEL PLUS Loan for the student enrolled half-time
The following types of subsidized federal student loans can be deferred without interest penalties:
- Direct subsidized
- Subsidized Stafford Loans
Students who hold the following loans are discouraged from taking a deferment because the interest accrues and must be paid once the active payment schedule resumes:
- Plus loans
- Direct unsubsidized loans
- Unsubsidized Stafford loans
Students with deferments may find themselves paying much more on their unsubsidized loans as their principal balance absorbs the unpaid interest amount. Or, the monthly payments on unsubsidized loans will have to grow to pay down the interest, potentially making them unaffordable.
Student Loan Forbearance: Federal Loans
A student loan forbearance may be granted to postpone payments, although interest continues to accrue on the loan. There are two types of student loan forbearance: general or mandatory.
A general forbearance is not automatic and the loan servicer is not required to grant one. Hence, a general forbearance may more commonly be called a “discretionary forbearance.” General forbearances must be requested, typically by a student who temporarily cannot make monthly payments. They may be granted for:
- Direct Loans
- FFEL Program Loans
- Perkins Loans
Lenders may grant a forbearance for up to 12 months, after which the student may re-apply for another. There are no limits on forbearance time for Direct or FFEL loans, but forbearances on Perkins loans are capped at three years. To apply for a forbearance, according to the Department of Education, the student must satisfy one or more of the following conditions:
- Severe financial difficulties
- Change or loss of employment
- Medical conditions/expenses
Unlike the discretionary terms of a general forbearance, lenders are required to grant a mandatory forbearance for up to 12 months at a time if the applicant:
- An activated member of the National Guard who is not qualified for the military deferment
- Qualified to apply for a teacher loan forgiveness
- An active participant in a medical or dental residency or internship
- Serving in an AmeriCorps position
- Has an outstanding loan amount that is 20 percent or more of their monthly gross income (up to three years)
Following the 12-month mandatory forbearance, the borrower may request an additional one.
Deferment and Forbearance: Private Student Loans
Private lenders are not required to offer or grant deferment or forbearance options on loans not backed by the federal government. At the same time, they may be willing to work with distressed borrowers who communicate their hardships immediately. In some cases, the loan servicer will grant a forbearance in 90-day periods up to two years.
One of the better alternatives may be to refinance the student loan. Private lenders are not automatically required to offer a consolidation loan; the borrower must apply for one. LendingTree provides a student loan refinance comparison platform that reportedly saves applicants an average of $14,417 over what they currently owe. Most lenders prefer refinancing applicants who are employed and have good credit.
Alternatives: Income Repayment Plans
Finally, the Department of Education also offers four separate repayment plans that are based on income. Any student borrower of a federal education loan can apply for repayment levels based on income and family size. Programs include:
- REPAYE Plan
- PAYE and IBR Plans
- ICR Plan
Visit Federal Student Aid to learn about requirements for participating in these income-based repayment options.