Loan Forbearance vs Deferment: Understanding the Differences and Implications

When dealing with student loans or other types of loans, borrowers may come across two options to alleviate their financial burdens: forbearance and deferment. While these terms are often used interchangeably, they have distinct differences that can impact how and when borrowers are required to repay their loans. This article explores these two concepts in detail, highlighting their features, benefits, and potential drawbacks, to help you make an informed decision about which option might be best for your financial situation.

1. What is Loan Forbearance?

Loan forbearance is a temporary reduction or suspension of loan payments, granted by the lender, due to financial hardship or other qualifying reasons. Unlike deferment, forbearance is not automatically granted and typically requires the borrower to apply for it.

Types of Forbearance

• Discretionary Forbearance: This type is granted at the lender's discretion, often based on the borrower's demonstrated financial difficulty. It does not require specific documentation beyond what is necessary to show hardship.

• Mandatory Forbearance: This type is required by law to be granted if the borrower meets specific criteria, such as serving in a medical or dental internship or residency, or having payments exceed a certain percentage of income. Borrowers must submit proof of eligibility to qualify.

Impact of Forbearance

During forbearance, the borrower may not be required to make payments, but interest continues to accrue on the loan. This can lead to an increase in the total amount owed, as the unpaid interest is often added to the principal balance, resulting in higher future payments.

2. What is Loan Deferment?

Loan deferment is another option that allows borrowers to temporarily postpone their loan payments. Unlike forbearance, deferment is often based on specific qualifying criteria and may not always be granted automatically.

Types of Deferment

• In-School Deferment: Available to students who are enrolled in school at least half-time. This option allows students to defer payments while they complete their education.

• Economic Hardship Deferment: For borrowers who are experiencing financial difficulties, such as unemployment or low income. Documentation of financial hardship is required to qualify.

• Military Deferment: Available to borrowers who are on active military duty. This deferment allows them to postpone payments while serving.

Impact of Deferment

One of the key advantages of deferment is that, for certain types of federal student loans, the government may pay the interest during the deferment period. However, for other types of loans, such as private loans or unsubsidized federal loans, the borrower is responsible for paying the interest that accrues during the deferment period.

3. Key Differences Between Forbearance and Deferment

Understanding the differences between forbearance and deferment can help borrowers make the right choice for their financial situation. Here are the primary differences:

• Eligibility Requirements: Deferment often has specific eligibility criteria related to the borrower’s current situation, such as enrollment status or economic hardship. Forbearance, particularly discretionary forbearance, is granted based on the lender's discretion and the borrower's demonstrated need.

• Interest Accrual: During deferment, certain federal student loans may have their interest paid by the government. In contrast, forbearance always involves the borrower paying the interest that accrues on the loan.

• Application Process: Forbearance typically requires a formal application and approval from the lender. Deferment often requires documentation of eligibility and may be automatically granted based on the borrower’s status.

4. Choosing Between Forbearance and Deferment

The choice between forbearance and deferment depends on several factors:

• Type of Loan: Federal student loans may offer more favorable terms for deferment compared to private loans. Understanding your loan type and its specific terms can help you make an informed decision.

• Financial Situation: If you’re experiencing temporary financial difficulties, forbearance might provide immediate relief. However, if you’re in school or experiencing long-term financial hardship, deferment might be a better option.

• Interest Accrual: Consider how interest will accrue on your loan during the chosen option. If you can manage to make interest payments, deferment might be more advantageous.

5. Practical Steps to Apply for Forbearance or Deferment

• Contact Your Lender: Reach out to your loan servicer or lender to discuss your options and determine which type of relief you qualify for.

• Submit Required Documentation: Whether applying for forbearance or deferment, be prepared to provide any necessary documentation to support your application.

• Understand the Terms: Before agreeing to forbearance or deferment, make sure you understand how it will affect your loan balance and repayment terms.

6. Conclusion

Both forbearance and deferment provide valuable options for borrowers facing financial difficulties. By understanding the differences between the two and evaluating your personal situation, you can choose the option that best suits your needs. Always stay informed about how these choices will impact your loan balance and future payments to manage your financial obligations effectively.