Understanding Student Loan Forbearance and Deferment
This day in age, Americans are faced with massive amounts of federal student debt. As I type this up, the national average has now surpassed $1.6 trillion and its not turning around anytime soon. Check for yourself at collegedebt.com.
If you’re struggling to keep up with your student loans, you have options to prevent you from defaulting. You can use things like deferment or forbearance to get through the struggle and get back on your feet. These options aren’t the most ideal, but can be used as a temporary tool while you find a more suitable alternative, such as an income driven repayment plan, to help you fix the situation for the long run. Let’s explore our options!
Student Loan Deferment
Student loan deferment is a federal repayment option that allows you to pause your student loan payments for up to three years. Depending on the type of loan you have, you may or may not be responsible for interest charges that accrue on your loan. As with anything, there are pros & cons involved.
Deferment Pros
If you choose to defer your student loans, you’ll be able to stop making payments without hurting your credit or entering default. This could potentially free up some cash in the budget for the necessities and life’s responsibilities. You’ll have some breathing room to allow you to catch up on things and get back on track.
Deferment Cons
Unfortunately, the government only covers the interest on unsubsidized federal student loans. Which means, if your loans are subsidized, your loan balance can grow while you’re in deferment because interest continues to accrue so you might end up paying back thousands more in interest once deferment is over.
To be eligible for student loan deferment, you must meet one of the following criteria:
- You are enrolled at least half-time at a qualifying university.
- You are unemployed or unable to find a full-time job.
- You are experiencing an economic hardship or serving in the Peace Corps.
- You are on active duty military service.
Deferments are not automatic so it requires action on your part. To apply, you must submit documentation showing you meet the eligibility requirements along with the appropriate forms which need to prepared and processed for review.
If for some reason you don’t qualify for student loan deferment, you might still be able to pause monthly your payments using student loan forbearance.
Student Loan Forbearance
Much like student loan deferment, forbearance can help if you’re in a bind by postponing your monthly payments. If you qualify, you can temporarily pause your student loan payments for up to 12 months with forbearance.
You should know, there are two types of forbearance: discretionary and mandatory.
With discretionary forbearance, your servicer will decide if you qualify. If you can show financial difficulties, medical expenses, or another cause deemed to be acceptable, you may be eligible.
Under mandatory forbearance, however, the government will require your loan servicer to grant your forbearance if you meet one of the following criteria:
- Your monthly payment on your loans is 20% or more of your gross income.
- You serve in an AmeriCorps position.
- You’re a teacher serving in an area that would qualify you for Teacher Loan Forgiveness.
- You serve in a medical or dental residency program.
Forbearance Pros
Forbearance can give you some welcomed relief while you get back on track when faced with a short-term emergency. In this scenario, you can also avoid falling behind on payments and damaging your credit by eliminating your payments for a short time.
Forbearance Cons
Unfortunately, as useful as forbearance can be, you should know there are some definite cons to consider. Regardless of your loan type, interest will continue to accrue on your loans and you’re responsible for paying that back. Since this adds to the cost of your total loan balance, it could potentially make it more difficult to become debt-free, but it beats risking default.
Things to Consider Before Applying
While deferment and forbearance can both provide temporary relief, there are some potential drawbacks as interests may continue to accrue. Either option will act as a sort of bandage to the bigger issue when faced with a financial emergency, but they won’t heal the burden for the long-term.
Remember, you must keep making student loan payments until you’re notified that your request has been approved. Otherwise, you may become delinquent on your student loans.
To learn more about your federal student loan repayment options, learn how to reduce, or even eliminate your payments with income-driven repayment plans give us a call, our agents are happy to help make sense of it all and get you back on track!