Deferment and forbearance both enable you to stop making payments on federal student loans but which is the better choice? (iStock)
Repaying student loans can be a major struggle, especially during tough economic times. If you lose your job or your income is low because you're volunteering or returning to school, you may be unable to make your payment at all.
Defaulting on a student loan has serious consequences, so you don't want to simply stop sending in your monthly check. Instead, look into deferment or forbearance. Both allow you to temporarily stop making payments without being classified as late, but the two processes are really different.
What is deferment?
Deferment is available under a limited set of circumstances and you must submit a request for deferment that's approved by your loan servicer. There are seven different kinds of deferment you might be eligible for including the following:
- Economic Hardship Deferment: If you’re in the Peace Corps; receive means-tested benefits, or have income below 150 percent of the poverty level, you could qualify for a maximum of three years of deferment.
- Graduate fellowship deferment: If you’re enrolled in an approved fellowship program, you can qualify while you’re completing your education.
- In-School Deferment: If you’re enrolled at least half the time in an eligible program, you can qualify. Students with Direct PLUS Loans can also get an additional six months of deferment after you no longer meet enrollment requirements. This is usually an automatic deferment.
- Military Service and Post-Active Duty Student Deferment: If you’re on active duty service and for up to 13 months after, you can qualify for this type of deferment.
- Parent PLUS Borrower Deferment: If the student you’re borrowing for is enrolled in school at least half time, you can qualify. You also get an additional six month grace period after enrollment ends.
- Rehabilitation Training Deferment: If you’re receiving vocational training or are in a rehabilitation facility for mental health, drug abuse, or alcohol abuse, you can qualify for this deferment.
- Unemployment Deferment: You can qualify for up to three years of deferment if you’re on unemployment benefits after losing a job.
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You do not have to make any payment when your loans are deferred. If you have eligible loans, such as Direct Subsidized Loans, the government also covers interest when loans are deferred. And the time your loans are in economic hardship deferment counts towards eligibility for Public Service Loan Forgiveness or towards the payments required on an income-driven payment plan before becoming eligible for loan forgiveness.
What is forbearance?
Forbearance also enables you to stop payments although, as with deferment, you need to make a request from your loan servicer and shouldn't stop making payments until you get approval.
You can request forbearance if you're experiencing:
- Financial problems
- Medical costs
- A change in job
Your loan servicer may also grant a request for forbearance under other circumstances. Forbearance can be granted for up to 12 months at a time and you can request another general forbearance if you're still facing challenges after that time is up.
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In some cases, mandatory forbearance is also available, which means the lender must grant forbearance. You're eligible for this if:
- You’re serving in AmeriCorps in a position that entitles you to a national service award.
- You qualify to have loans partially repaid under the Department of Defense Student Loan Repayment program.
- You’re completing a medical or dental internship or residency.
- You’re in the National Guard and your unit is activated but you don’t qualify for a military deferment.
- Your total monthly loan payment for all federal loans exceeds 20 percent of monthly income.
- You’re doing teaching work that entitles you to teacher loan forgiveness.
Mandatory forbearance can also be granted for up to 12 months at a time.
Deferment vs. Forbearance: Which is a better option for you?
Both deferment and forbearance can provide financial relief. However, deferment is usually a better option if:
- You have subsidized student loans. Deferring them means interest won’t accrue, while interest continues to be charged when loans are in forbearance. When your loans come out of forbearance, the unpaid interest is added onto the principal balance.
- You qualify for economic hardship deferment. You can pause payments but still have the time when your loan is in deferment count towards your eligibility for loan forgiveness.
Forbearance, on the other hand, can be a better option if you have used up your eligibility for deferment or if you don't qualify for it.
Other strategies to pay off student loans fast
Pausing your payments through either deferment or forbearance isn't always best. You may wish to look into income-driven payment options that cap payments at a percentage of income – especially if your financial challenges are likely to be long-term.
Refinancing your loans could also reduce your interest rate and monthly payment, although opting to refinance would mean giving up important federal loan benefits including eligibility for forgiveness or payment plans capped as a percentage of income.
Whatever options you're considering, it's always best to look at the big picture including both how your monthly payment and total loan repayment cost will be affected by your choice.