Deferment vs Forbearance: Which One is Better for Student Loans?
When you are finding it difficult to repay your student loans, requesting forbearance or a deferment might give you the required breathing space. You can delay your student loan repayments or pay a lower amount, depending on the situation.
With deferment, you have the option to delay payments for six-month periods. You might have to pay the accrued interest if you have an unsubsidized federal student loan. However, for forbearance, you need to pay accrued interest for the term, which is then added to the outstanding principal amount of the loan.
Both options are helpful for resolving similar situations, but the eligibility criteria, terms, and interest rates vary. Before determining the appropriate course of action, focus on the significant differences that you should consider before submitting a request.
The Difference Between Deferment and Forbearance
By the end of 2019, almost 3.4 million student loans were in deferment, and another 2.7 million were in forbearance. It is easier to get approved for either when you have a federal student loan.
You can apply deferment for up to 36 months if you haven’t defaulted on the loan and if you have a subsidized loan you don’t have to pay any interest for the deferred term.
Let’s compare the key aspects of a deferment and a forbearance:
|Credit Score||Doesn’t impact your credit score||Doesn’t impact your credit score|
|Interest||In most federal loans (Perkins, FFEL, Direct), borrowers don’t need to pay any interest||Irrespective of the type of loan, borrowers have to pay an accrued interest over the term which will be added to the outstanding principal (capitalization)|
|Term||The term varies according to multiple factors. You can request 6-month terms for 36 months or more.||Fixed terms of 12 months, and a total of 36 months.|
|Types||There are no sub-types of deferment||Two broad types – General and Mandatory|
|How to Apply?||For federal student loan deferment, you have to apply in most cases (other than the In-School Deferment). To apply, search and apply via the US Department of Education’s federal student aid website. For a student loan deferment on a private loan, you will need to contact the lender.||You can apply directly with the loan service provider. You may need a letter from an authorized internship/residency program official certifying your program’s start and end dates.|
|Approval||For most federal loans, deferment comes as a pre-approved option.||Approval is at the discretion of the loan service provider.|
While both might seem lucrative options, it is better to consult the lender for better understanding. Depending on your financial situation, they will be able to suggest what best suits you.
Which One Should You Go for?
Depending on your financial situation, either option can work for you. However, if you have the option to choose, deferment should be the first option on your list. The biggest reason behind this is that if you have a subsidized student loan, you won’t need to pay any interest during the deferred term.
Better yet, with most federal student loans, deferment comes as an added option. This means you might be able to prequalify for one (if you haven’t defaulted on the loan yet).
You should apply for a deferment if you meet one or more of the eligibility criteria:
- Enrolled in a recognized institution at-least half time
- Pursuing a rehabilitation training or a graduate fellowship program
- Active servicemen in the US Military, AmeriCorps, or Peace Corps
- Unemployed, or earning less than the State’s Poverty Guidelines
- Temporarily having difficulty paying (but can start paying within a short time)
In case, you aren’t eligible for a deferment, but meet one or more of the criteria listed below, you can apply for a forbearance:
You aren’t eligible for a military deferment
- You meet the criteria for the Teacher Loan Forgiveness program
- Your total debt exceeds 20% or more of your gross monthly income (up to 3 years)
- You are an active-duty serviceman or serve in the AmeriCorps
- You are serving a medical/dental internship or residency program
- You foresee long-term financial hardship
- Unexpected medical expenses
Who Pays the Interest Rates During Deferment and Forbearance?
If you have a subsidized federal loan like a Direct, FFEL, or Perkins loan, you don’t have to worry about paying interest on the term. However, if the loan is unsubsidized, you will be charged accrued interest. Still, not all private lenders agree to deferment. Even if they do, the accrued interest will likely be added to the total due.
Irrespective of the type of forbearance, the borrower has to pay the interest. The total interest for the term will be added to the final outstanding principal, thereby increasing the total amount you will repay over the life of the loan.
How to Get Back to Repayment Loans?
It doesn’t matter if you choose a forbearance or a deferment, you will have to move back the agreed repayment plan sooner or later. It is advised that you roll back to the pre-decided repayment plan at the earliest. Not only will this help you save on the interest, but it will also help you repair your credit history. When your term is over, you will be notified by the lender, and your existing term will be reinstated.
Deferment is a better option than forbearance. Some lenders do use the term interchangeably, so you must have a clear discussion to better understand the agreement. In any case, make sure that you haven’t defaulted on your student loan for more than 270 days, or you won’t be eligible for either.
Check out other repayment plans, get an estimate of the interest rates that you have to pay in either case and be absolutely sure to consult with your lender before finalizing any agreement.