Difference Between Student Loan Deferment and Forbearance

Navigating student loans can be complex, especially when financial difficulties arise. Two common options for managing student loan payments during tough times are deferment and forbearance. Understanding the differences between these options is crucial for making informed decisions about managing student debt. Both deferment and forbearance allow borrowers to temporarily stop making payments, but they come with distinct features, eligibility criteria, and impacts on the loan balance.

Deferment vs. Forbearance: Key Differences

1. Definition and Purpose

• Deferment is a temporary postponement of loan payments, usually granted for specific reasons such as returning to school, unemployment, or economic hardship. During deferment, the borrower does not need to make payments, and, depending on the type of loan, interest may not accrue.

• Forbearance is also a temporary suspension of payments, but it is typically granted for other reasons, such as financial hardship or illness, when the borrower does not qualify for deferment. Unlike deferment, interest accrues on all types of loans during forbearance.

2. Eligibility Criteria

• Deferment: Eligibility depends on the type of loan and the reason for the deferment. Federal student loans offer several deferment options, including:

  • In-School Deferment: For borrowers enrolled at least half-time in a qualified educational program.
  • Economic Hardship Deferment: For borrowers facing financial difficulties.
  • Unemployment Deferment: For borrowers who are actively seeking employment but are unable to find a job.

  Eligibility criteria for deferment may vary for private loans, and not all private lenders offer deferment options.

• Forbearance: Borrowers are generally eligible for forbearance if they are experiencing financial difficulties or temporary hardships. Federal loans offer two types of forbearance:

  • General Forbearance (Discretionary Forbearance): Granted at the lender’s discretion for reasons such as financial difficulty or illness.
  • Mandatory Forbearance: Required by law for certain situations, such as serving in a medical or dental internship.

  Eligibility for forbearance is determined by the loan servicer, and specific criteria can vary.

3. Interest Accumulation

• Deferment: Interest accrual depends on the loan type:

  • Subsidized Federal Loans: Interest does not accrue during deferment periods.
  • Unsubsidized Federal Loans and Private Loans: Interest accrues during deferment, which may be added to the principal balance if not paid.

• Forbearance: Interest accrues on all types of loans during forbearance, and this interest is typically capitalized (added to the principal balance) at the end of the forbearance period, increasing the total loan balance.

4. Impact on Loan Balance

• Deferment: For subsidized federal loans, there is no increase in the principal balance during the deferment period. For unsubsidized federal loans and private loans, accrued interest may be added to the principal balance if not paid during deferment.

• Forbearance: Interest that accrues during forbearance is generally capitalized, increasing the total amount owed by the borrower. This means that borrowers may end up paying more over the life of the loan compared to deferment.

5. Application Process

• Deferment: To apply for deferment, borrowers must submit a deferment request form and, in some cases, provide documentation to prove eligibility (e.g., enrollment verification for in-school deferment or proof of economic hardship).

• Forbearance: To apply for forbearance, borrowers need to contact their loan servicer and submit a forbearance request form. They may also need to provide documentation of their financial situation or other qualifying circumstances.

6. Duration and Limits

• Deferment: The duration of deferment depends on the reason and loan type. For example, in-school deferment lasts as long as the borrower is enrolled at least half-time, while economic hardship deferment typically has a maximum duration of three years.

• Forbearance: The maximum duration for general forbearance is typically 12 months, but it can be renewed if necessary. Mandatory forbearance periods are also limited and based on specific qualifying criteria.

Choosing Between Deferment and Forbearance

When deciding between deferment and forbearance, borrowers should consider the following factors:

• Interest Accrual: Deferment may be more beneficial if the borrower has subsidized federal loans, as interest does not accrue during deferment. Forbearance can be more costly due to accruing interest on all types of loans.

• Eligibility: Borrowers should determine which option they are eligible for based on their circumstances and loan type. If deferment is not available, forbearance may be the next option.

• Long-Term Impact: Borrowers should evaluate how each option affects their overall loan balance and repayment plan. Deferment might be preferable if it minimizes additional interest, while forbearance may be necessary for short-term relief.

Conclusion

Understanding the differences between student loan deferment and forbearance is essential for managing student loan debt effectively. Deferment offers a potential advantage for subsidized loans by not accruing interest, while forbearance, though providing temporary relief, often results in higher costs due to interest accrual. Borrowers should carefully review their eligibility, loan terms, and financial situation to choose the best option for their needs.