Loan Deferment vs Forbearance: Understanding the Differences

When managing student loans or other types of debt, borrowers often encounter terms like "deferment" and "forbearance." While both options provide temporary relief from payments, they have distinct differences that can affect your financial situation. This article will delve into the details of loan deferment and forbearance, exploring their definitions, benefits, drawbacks, and how they impact your loan terms and credit score. By the end, you'll have a clearer understanding of which option might be more suitable for your needs and how to apply for each.

Understanding Loan Deferment

Loan deferment is a temporary postponement of loan payments. During this period, the borrower is not required to make payments, and in many cases, interest does not accrue on subsidized loans. Here’s a breakdown of what deferment entails:

1. Eligibility: To qualify for deferment, borrowers must meet specific criteria set by the loan servicer or lender. Common reasons for deferment include enrollment in school, economic hardship, military service, or certain types of disability.

2. Interest Accrual: On subsidized federal student loans, the government pays the interest during deferment. However, on unsubsidized loans, interest continues to accrue, which will be added to the principal balance once the deferment ends.

3. Duration: Deferment periods vary depending on the type of loan and the reason for deferment. For example, school enrollment deferments can last as long as the borrower remains in school, whereas economic hardship deferments may have a time limit.

4. Application Process: To apply for deferment, borrowers typically need to provide documentation to their loan servicer proving eligibility. This might include proof of enrollment or evidence of financial hardship.

5. Impact on Loan Term: Deferment can extend the repayment term, as payments are postponed. For subsidized loans, the benefit is that no additional interest is added, but for unsubsidized loans, the total loan balance increases due to accruing interest.

Understanding Forbearance

Forbearance is a temporary reduction or suspension of loan payments due to financial difficulties or other reasons. Unlike deferment, forbearance is generally granted at the lender's discretion and often involves different terms:

1. Eligibility: Forbearance is available for most types of loans, including federal and private loans. Borrowers typically need to demonstrate financial hardship or other extenuating circumstances.

2. Interest Accrual: Unlike deferment, interest continues to accrue on all types of loans during forbearance. This interest is capitalized, meaning it is added to the loan principal, increasing the total amount to be repaid.

3. Duration: Forbearance periods are usually limited, often up to 12 months. Borrowers can apply for additional periods if necessary, but the total time allowed may be restricted by the lender or servicer.

4. Application Process: Applying for forbearance usually requires contacting the lender or loan servicer and providing evidence of financial difficulties or other qualifying reasons. Each lender may have different requirements and processes.

5. Impact on Loan Term: Forbearance can extend the loan term due to postponed payments, and because interest accrues during this period, the total cost of the loan increases. This can result in higher monthly payments once the borrower resumes regular payments.

Key Differences Between Deferment and Forbearance

To better understand the differences between deferment and forbearance, here’s a comparative overview:

Aspect	Deferment	Forbearance
Eligibility	Specific criteria like school enrollment or hardship	Financial difficulties or other reasons
Interest Accrual	Subsidized loans: No interest; Unsubsidized loans: Accrued interest	Interest continues to accrue on all loans
Duration	Varies by reason and loan type	Generally up to 12 months, with possible extensions
Application Process	Requires proof of eligibility, like school enrollment or hardship	Requires proof of financial difficulty or other reasons
Impact on Loan Term	Extends term, no additional interest for subsidized loans	Extends term, additional interest added to principal

When to Choose Deferment or Forbearance

Deferment might be the better choice if you qualify, especially if you have subsidized loans where the government covers interest costs. It’s often preferable for longer-term situations like ongoing education or extended economic hardship.

Forbearance can be useful if you don’t qualify for deferment or if your situation is temporary. However, because interest accrues during forbearance, it’s generally more expensive over time. It’s suitable for short-term financial difficulties or when deferment options have been exhausted.

Impact on Credit Score

Both deferment and forbearance generally do not affect your credit score directly as long as you continue to meet the terms of the agreement and communicate with your lender. However, since forbearance often involves accruing additional interest, it can indirectly affect your credit score by increasing your total loan balance and potentially your monthly payments.

Conclusion

Choosing between deferment and forbearance depends on your individual financial situation and the type of loan you hold. Deferment is often preferable if you qualify, particularly for subsidized loans due to the absence of interest accrual. Forbearance, while more flexible, can lead to higher overall loan costs due to accruing interest. Understanding these options and their implications can help you manage your loans more effectively and make informed financial decisions.

By carefully evaluating your eligibility, the impact on your loan balance, and the duration of relief, you can select the option that best aligns with your financial needs and long-term goals.