Deferment vs Forbearance
When facing financial hardships, federal student loan borrowers have options to temporarily postpone payments through deferment or forbearance. Both provide breathing room in times of distress. However, the two relief programs differ in important respects.
Understanding the unique pros and cons of deferment vs forbearance empowers borrowers to make smart financial decisions during periods of instability. This guide will compare eligibility requirements, impacts to loan terms, effects on credit, and overall advantages of each option.
Let’s explore how deferment and forbearance can strategically help manage student loans during personal or economic challenges, and make an informed choice between the two.
Overview of Deferment
Deferment allows temporary postponement of federal student loan payments for specific circumstances. Key attributes include:
- Pauses payments for set timeframes like 6 months or 1 year initially.
- Qualifying hardships include unemployment, economic hardship, disability, military service, and continuing education.
- Interest often does not accrue during deferment on subsidized loans. It does accrue for unsubsidized loans.
- Eligible for Direct Loans, FFEL Program loans, and Perkins Loans.
- Requested through loan servicer and renewed as needed.
- Enrollment status and eligibility are verified.
- Loans in good standing qualify more easily.
- Credit score not damaged if payments made in full once deferment ends.
Deferment provides short-term relief tailored to circumstances that disrupt your ability to make payments. It aims to help borrowers get back on track.
Overview of Forbearance
Alternatively, forbearance also allows you to temporarily stop making payments or pay a smaller amount for a limited time. Details include:
- Initial forbearance period of up to 12 months. Can be renewed.
- Approved reasons are more flexible and expansive than deferment.
- Interest accrues on all loan types during forbearance.
- Mandatory forbearance granted for certain situations like medical internship.
- Discretionary forbearance requested if facing financial hardship.
- Easy to qualify but conditions typically not verified.
- More damaging to credit score if not managed carefully.
- Ideal for short 1-2 month gaps between income rather than long periods.
Forbearance offers a safety net when deferment eligibility requirements are not met but you need brief flexibility.
While both provide temporary payment relief, notable differences exist:
- Specified allowance in loan terms
- Must meet eligibility criteria
- Often 6-12 months initially
- Many deferment types pause interest
- No negative credit impact
- More flexible allowance
- Easier to qualify
- Often 1-3 months initially
- Interest always accrues
- Risks credit score drop
Deferment works best for longer hardships like unemployment when controlling interest costs is critical. Forbearance suits shorter 1-2 month gaps where interest impact is lower.
You can request deferment during periods where you:
- Are enrolled in college or graduate school at least half-time
- Are unemployed or unable to find full-time employment (for up to 3 years)
- Are experiencing economic hardship as defined by federal law
- Are serving active duty military or post-active duty
- Qualify under the rules of other authorized deferment types
Documentation like enrollment verification, unemployment approval, and military orders may be required. Eligibility reasons are defined by the Department of Education. Talk to your servicer about qualifying.
Eligibility for discretionary forbearance is more flexible:
- Financial difficulties making it hard to pay
- Change of employment
- Medical expenses or family emergencies
- Student loan debt burden
- Other acceptable reasons per servicer
As long as the hardship makes payments challenging, forbearance is typically approved. But recurring or long-term hardships may get more scrutiny.
Mandatory forbearances are granted when:
- Serving AmeriCorps or in a medical internship or residency
- Monthly payment amount drops to $0 under an income-driven plan
- In a military mobilization or national emergency
Deferment Interest Benefits
A major advantage of deferment over forbearance is paused interest:
- On Direct Subsidized Loans and Perkins Loans, interest does NOT accrue during deferment periods.
- On Direct Unsubsidized Loans and PLUS Loans, interest still accrues but does not capitalize as long as payments resume after deferment.
This interest benefit keeps loan balances from growing. For subsidized loans, the government covers your interest completely while payments are postponed.
Forbearance Interest Costs
However, under forbearance:
- Interest accrues on ALL loan types – subsidized, unsubsidized, PLUS, etc.
- Accrued interest capitalizes (gets added to principal) when forbearance ends.
This causes balances to grow rapidly. The only way to prevent capitalized interest is to make interest-only payments during forbearance.
Deferment timelines depend on the specific type approved:
- In school: As long as enrolled at least half-time
- Unemployment: Initial approval for 12 months, can renew 2 times for maximum 3 years
- Economic hardship: 1-year increments approved initially, can be renewed
- Military service: During active duty and for 13 months following active duty
You must reapply and requalify at intervals appropriate for each deferment reason. Time limits prevent indefinite postponement of repayment.
Forbearances are granted in the following increments:
- Discretionary: Initial approval for 12 months, renewable
- Mandatory: Varies based on situation causing forbearance but often 3-12 months
While deferments have defined durations, forbearance timelines depend more on the lender and are open ended. However, interest costs make forbearances expensive over time so they should be used only as needed short-term.
Deferment Creditor Communications
To get approved for deferment and prevent delinquency:
- Contact servicer before missing payments to ask about eligibility
- Formally apply for deferment and submit documentation proving eligibility
- Make interest payments during deferment on unsubsidized loans if possible
- Stay in touch with servicer throughout process
- Update servicer when situation changes so deferment adjusted appropriately
Deferment prevents negative credit impacts but active communication ensures proper enrollment and transition once deferment ends.
Forbearance Creditor Communications
Best practices for forbearance include:
- Ask servicer about short 1-2 month discretionary forbearance if possible over longer periods to limit interest costs
- Apply as soon as foresee a payment issue arising; can get pre-approval
- Pay what you can during forbearance to limit balance growth
- Set calendar alerts to reassess financials near forbearance end date
- Call servicer 1 month before end date to review options going forward if still struggling
Close lender contact and planning ahead helps limit forbearance periods to the minimum time essential. This prevents compounding interest from erasing too much progress made prior.
Benefits that make deferment a top choice when eligible include:
- Postpones payments but often freezes interest as well
- Clearly defined eligibility criteria
- Enrollment and status formally verified
- No credit score impact if resume normal payments after
- Gives time to restore financial stability
- Allows focus on essential expenses during crisis
- Keeps federal loan benefits and protections intact
Potential disadvantages to weigh include:
- Requires fitting specific eligible categories
- Needs formal application and documentation for approval
- Borrower must reapply at expiration if hardship continues
- Does not apply to private student loans
- Principal still grows on unsubsidized loans unless paying interest
- Total interest costs higher if frequent or long deferments
While not perfect and still accruing some interest, deferment provides structured temporary relief that protects credit.
Forbearance benefits include:
- More flexible eligibility standards
- Can request while deferment eligibility is determined
- Pre-approval available before payments miss
- Also applies to FFELP and Perkins loans
- Pause payments for unexpected circumstances
Offsetting considerations include:
- Interest accrues and capitalizes, growing balance
- Qualifying reasons not formally verified
- Easy to overuse, delaying inevitable payment resumption
- Requires close tracking of expiration dates
- Can damage credit score if used long term
- Does not offer long multi-year options deferment does
Forbearance is better suited for quick gaps between steady income rather than indefinite relief.
Deferment vs Forbearance: Which is Better for Credit Score?
Neither program directly harms your credit if handled responsibly:
- Deferment prevents any negative marks as long as payments promptly resume once expired.
- Forbearance only hurts credit if it allows delinquency or late payments to occur.
However, forbearance has higher risk of indirect damage over time:
- Capitalized interest increases total debt owed.
- Higher balances worsen credit utilization ratio once payments restart.
- Lingering hardship could cause eventual missed payments despite forbearance.
Carefully tracking expiration dates and having a plan is crucial to transition off forbearance smoothly without hurting creditworthiness. Deferment poses less risk of unintended score impacts.
Deferment vs Forbearance: Which Saves More Money?
Deferment often saves borrowers more over the long run:
- Interest does not grow on subsidized loans during deferment.
- Capitalized interest can be avoided on unsubsidized loans by handling diligently.
- More structured durations prevent unintended overuse.
Conversely, forbearance’s compounding interest and flexible timeline can lead to balance growth:
- Interest accrues and capitalizes on all loans types during forbearance.
- Open-ended timeframe makes it easy to delay resuming payments.
- Lack of formal eligibility verification or documentation means potential overuse.
Deferment incentives keeping duration brief while also limiting interest costs for maximum savings.
Deferment vs Forbearance: Which is Easier to Qualify For?
Forbearance requirements are notably more flexible:
- Most any hardship making payments unaffordable qualifies.
- Simple application and no formal documentation to verify reasons.
- Can request while awaiting deferment eligibility determination.
- Often pre-approved once initially in place if hardship continues.
Meanwhile, deferment involves more steps:
- Must demonstrate fitting into specific allowed categories like unemployment.
- Requires documentation like job loss notices.
- Duration limits eventually require reapplication.
- New deferment type may be needed if circumstances change.
Forbearance is easier initially but renewals get similar scrutiny to deferment applications.
Wrap Up: Smart Use of Each Program
To summarize, deferment and forbearance each have appropriate uses:
Deferment works best for:
- Longer hardships like unemployment where interest costs would rapidly snowball.
- Situations with clearly defined qualifying parameters.
- Cases where formal verification documents like orders or notices are readily available.
- Responsible borrowers good at managing expiration dates and transitions.
Forbearance helps most with:
- Short unexpected income gaps of 1-3 months between steady pay.
- Needing immediate relief while awaiting deferment approval.
- Scenarios too unique for deferment categories but still making payments temporarily impractical.
- Quick preapproval before payments potentially miss.
Neither is universally better. Evaluate current hardship, income stability, duration needed, and loan types to choose wisely between deferment and forbearance.