Can’t Pay Your Loans? Consider Forbearance or Deferment

If you’re struggling to repay your student loans, you’re not alone. According to the Federal Reserve, about 2 in 10 student loan borrowers are behind on their payments. If you are facing the possibility of falling behind, you may be considering options such as forbearance and deferment.

These options can provide some temporary relief from paying your student loans. As long as your federal student loans aren’t in default, you may qualify.

Both forbearance and deferment postpone your student loan payments, but with a few significant differences. forbearance will increase your loan amount from mounting interest. Deferment won’t since many types of federal loans don’t accrue interest during the deferral period.

Federal student loans enter default after payments are 270 days late. You can check your federal student loan status at studentaid.gov. All of your federal student loans will be listed on the site, along with their repayment status.

Forbearance and deferment can be great options until you get back on your feet. However, to make sure either is a good option for you, you need to understand both in more detail. Let’s look at forbearance vs. deferment: what they are, who qualifies, and what to do next.

Federal student loan forbearance allows you to make significantly reduced payments or skip them altogether for a fixed period of time. This can be helpful during a time of financial stress. Forbearance is also an option offered to individuals who serve in certain government programs.

• What are the benefits of forbearance? The benefits of forbearance include skipped or reduced payments. This can provide time to get your personal finances in order. The downside to forbearance is that interest will continue to accrue in the meantime.

• Do you have to pay back forbearance? You do have to pay back loans that are postponed or reduced during forbearance. While you’re not making payments, interest will be added to your overall loan balance. If you have direct loans, the accruing interest will be capitalized and added to your principal amount when the forbearance period ends.

• Does forbearance affect credit? Student loan forbearance should not affect your credit. In fact, while you’re in forbearance, your lender will not report your late payments or missed payments to the credit bureaus. The lender may report your forbearance, but it won’t affect your credit score.

There are two types of federal student loan forbearance: mandatory forbearance and general forbearance.

Mandatory Forbearance

Mandatory forbearance only applies to Direct Student Loans and Family Federal Education Loans (FFEL). Your loan servicer will postpone your monthly payments for up to 12 months. If you continue to be eligible, they can extend forbearance longer.

The student loan servicer is required to accept your request for forbearance if your meet any of the following criteria:

• You’re enrolled in a medical or dental internship or residency program.

• You’re a National Guard member and have been activated by a governor.

• You are eligible for Teacher Loan Forgiveness by teaching in a qualifying role.

• Your monthly federal student loan payments are 20% or more of your total monthly gross income.

• You qualify for partial student loan repayment options through the U.S. Department of Defense Student Loan Repayment Program.

• You received a national service award by serving in an AmeriCorps position.

General Forbearance

If you have direct, FFEL, and Perkins loans and don’t meet the requirements for a mandatory forbearance, you may be eligible for general forbearance.

You must request forbearance of this kind, and lenders aren’t required to grant it. However, you may be approved for general forbearance in some circumstances, including:

• You’ve experienced a setback in employment like a job loss or pay reduction.

• You have significant medical expenses.

• Other serious financial difficulties.

The path to general forbearance is less straightforward, but still worth discussing with a student loan lawyer if you think you may qualify. Again, only borrowers who are not in default are eligible for either type of forbearance.

For borrowers in default, you aren’t out of options. If you have financial difficulties, you should explore income-driven repayment plans — these allow for monthly payments as low as $0.

Like forbearance, student loan deferment allows you to stop making payments or reduce the monthly payment amount. But the deferral period can be as long as 3 years in most cases.

If you have federally subsidized student loans, no interest accrues. This is because the government pays the interest for you. However, unsubsidized loans will accrue interest during deferment, which is added to the total amount due once deferment ends.

Federal student loans require you to apply for deferment. To apply, go to the U.S. Department of Education Federal Student Aid Repayment Forms website. Then, click on Deferment, and download an application for the deferment for which you qualify.

Federal student loans allow deferment for the following:

• In-School Deferment is automatic if you are enrolled in school at least half-time.

• In-School Parent Deferment if you’re a parent who took out a Direct Parent Plus or FFEL Parent PLUS loan. The student who received the loan must be enrolled at least half-time.

• Unemployment Deferment pauses payments for up to three years if you become unemployed. You must be receiving unemployment benefits and must reapply every 6 months.

• Economic Hardship Deferment is available if you are experiencing financial hardship and receiving state or federal assistance like SNAP or TANF.

• Military Deferment applies to active duty military service members deployed for war, a military operation, or a national emergency. This allows for a 13 months grace period to find a job or return to school.

• Peace Corps Deferment of up to three years is also available if you serve in the Peace Corps.

• Cancer Treatment Deferment is available to pause student loan payments during treatment and for 6 months following the conclusion of treatment.

Just like forbearance, you must not be in default in order to qualify for deferment.

Some people have financial difficulties even though their incomes are high because they have significant expenses. These can include items like child support payments, medical issues, business losses, and more.

An income-driven repayment plan wouldn’t help you in these circumstances, because those plans only count your income and family size, not your expenses. In these cases, forbearance or deferment could be a better choice and give you time to financially regroup.

These two terms can seem interchangeable, but each has different eligibility requirements and impacts on your loans. To truly understand what may work for your loans, you’ll need to consider the details in each arrangement.

Let’s break down the similarities and differences of forbearance vs. deferment.

Similarities between forbearance and deferment

In terms of finances, forbearance and deferment both offer:

• Allow you to postpone or reduce your federal student loan payments.

• Have no effect on your credit report or credit scores.

Both are designed for people who cannot pay their federal student loans but are not currently in default.

Differences between forbearance and deferment

What’s the difference between forbearance and deferment? The differences between forbearance and deferment include:

• Interest accrual. Deferment on subsidized federal student loans and Perkins Loans won’t accrue interest. However, forbearance will continue to accrue interest on all federal student loans, which is added to your loan balance.

• Length of time. A deferment period can be as long as 3 years. In comparison, forbearance limits you to a maximum of 12 months.

• Who qualifies. Student loan deferment is usually tied to a specific event like job loss or enrollment in higher education; forbearance is not.

• Availability. Unless you qualify for a mandatory forbearance, it’s up to your lender to grant you forbearance. If you are eligible for deferment, your lender must grant you a deferment.

Private student loans are very different from federal student loans. While many private student loan lenders offer deferment while you’re in school or active military duty, not all of them will offer forbearance.

For private lenders that do offer forbearance, you won’t get any relief from the interest. This is because interest always accrues during forbearance on private student loans.

Additionally, the duration of forbearance on private student loans is much shorter than that of federal student loans. Usually, private student loans will limit your forbearance period to just a few months (1 to 3 months).

Due to the COVID-19 pandemic, the government passed measures expanding relief options for student loan borrowers. The CARES Act passed in 2020 outlined assistance regarding outstanding student loan debt.

The CARES Act provided the following measures for student loans:

• Automatic forbearance to most federal loan borrowers. No application is required.

• 0% interest rate on federally held student loans.

• A pause on all collection activities on most federal student loans in default.

President Biden’s American Rescue Plan passed earlier in 2021 extends these measures to January 31, 2022. Now many of these measures have been extended until Sept. 1, 2022.

Private student loans are not subject to these guidelines. However, lenders may provide some relief; you’ll have to call and discuss your options with them directly.

Unfortunately, forbearance and deferment are only for federal student loans that aren’t in default. If you’re far behind on payments, there are actions you can take to improve your student loan situation.

If your student loans are in default, you still have the following options:

• Repayment – likely the most expensive as this requires paying the entire outstanding amount.

• Rehabilitation – you’ll make 9 on-time payments within a specified period. Your student loan will no longer be in default. You’ll regain eligibility for forbearance, deferment, or other repayment plans.

• Consolidation – a consolidation is like a refinance in that it combines your defaulted student loan with other loans into one convenient monthly payment.

• Settlement – you may be able to negotiate a lesser amount to pay in one lump sum. Like repayment, however, this requires quite a bit of cash all at once.

Torn between your choices, or don’t even know where to start? You don’t have to do this alone.

I get it. Navigating your student loan situation can be confusing and even overwhelming. Struggling to keep your personal finances in order makes things even harder.

Let’s talk. Schedule a call with me today. We can go over your financial situation, discuss your options, and make a plan to get you on a path toward real results.