Financial hardship caused by the loss of a job, or a medical emergency can be serious for individuals and families. In these instances, the idea of maintaining student loan payments may be overwhelming. But it’s important to know that you have options to prevent default. In certain cases, you can temporarily postpone student loan payments through a deferment or forbearance. These options can help keep student loans in good standing and prevent credit damage.
- Borrowers must meet specific criteria to qualify for deferment
- Deferments are mandatory if a borrower meets the necessary requirements
- Borrowers can request deferment when experiencing severe economic hardship, unemployment, while enrolled in school, or while serving on active military duty
- Borrowers with subsidized loans will not be charged interest during periods of deferment; Unsubsidized loans continue to accrue interest during periods of deferment, which can result in greater total loan costs
- Borrowers who do not qualify for a deferment may still qualify for forbearance
- Forbearance can be mandatory and discretionary
- Borrowers can request forbearance if experiencing illness or financial hardship
- Both subsidized and unsubsidized loans will accrue interest during periods of forbearance
- Once the forbearance ends, any unpaid interest will be capitalized (added to the principal balance), which can increase the total cost of the loan
Deciding on Deferment or Forbearance
Deferment and forbearance are both great tools to help prevent a student loan default. But when deciding whether to request deferment or forbearance, it is preferable to apply for a deferment first. This is because borrowers will receive an interest subsidy benefit during deferment that is lost during forbearance.
It is also worthwhile to explore alternative repayment plans, such as an Income-Based Repayment Plan, before deciding to postpone payments. If you can afford lower payments on an alternative plan, you can avoid the added interest costs that come with deferment and forbearance. Also, you can save your postponement time for emergencies, as deferment and forbearance time is limited.
During deferment, most loans will continue to accrue interest. The borrower will not be responsible for paying interest on Perkins Loans, Direct Subsidized Loans or FFEL Stafford Subsidized Loans.
While the borrower is not required to make any payments during deferment, he or she is ultimately responsible for any interest that accrues during deferment on any non-subsidized loans. If the borrower chooses not to pay the interest during deferment, that unpaid interest will be added to the loan’s principal balance, increasing the total overall cost of the loan, and possibly resulting in a higher loan payment in the future.
A borrower can contact his or her servicer to check on eligibility for deferment. A borrower can request deferment in the following cases:
- While enrolled at least half-time in college or a career school
- While enrolled in an approved graduate fellowship program or an approved rehabilitation training program for the disabled
- If the borrower is experiencing unemployment or inability to find full-time work
- If the borrower is experiencing economic hardship (including Peace Corps service)
- During a period of active duty military service during a war, military operation, or national emergency
- In the 13 months following the conclusion of qualifying active duty military service, or until borrower returns to enrollment on at least a half-time basis, whichever is earlier, if
- Borrower is a member of the National Guard or other reserve component of the U.S. armed forces and
- Borrower was called or ordered to active duty while enrolled at least half-time at an eligible school or within six months or having been enrolled at least half-time
In most instances, a borrower will have to request a deferment. A loan servicer will not typically apply a deferment automatically, or without proper documentation. In cases of in-school deferments, some schools will submit the borrower’s enrollment status to the National Student Loan Clearinghouse, which is responsible for notifying the borrower’s loan servicers of enrollment in school. Still, borrowers are encouraged to contact their servicers directly to confirm deferment has been properly applied to their loans.
For borrowers ineligible for deferment, forbearance may be an option. During forbearance, payments are postponed for up to 12 months at a time. Since all loans continue to accrue interest during forbearance, it should be used only when absolutely necessary. While the borrower is not required to make any payments during forbearance, he or she is ultimately responsible for any interest that accrues during forbearance.
Following the conclusion of the forbearance period, any unpaid interest will be capitalized (added to the principal balance), increasing the total amount of the loan, and possibly resulting in a higher loan payment in the future.
Forbearance may be mandatory or discretionary. A loan servicer will not typically apply a forbearance automatically. Rather, the borrower is responsible for contacting the loan servicer to request forbearance. Sometimes the borrower may be required to show supportive documentation.
In certain instances, the loan servicer or lender is required to grant a borrower’s request for forbearance. Mandatory forbearances are granted in the following cases:
- Periods when the borrower is serving in a medical or dental internship or residency program (certain requirements must be met)
- If the total monthly payment for all student loans is equal to 20 percent or more of the borrower’s total monthly gross income (borrowers must meet other conditions)
- While the borrower serves in a national service position for which a national service award was received
- During periods of teaching service that will qualify for teacher loan forgiveness
- If the borrower qualifies for partial repayment of his or her loans under the U.S. Department of Defense Student Loan Repayment Program
- While the borrower serves as a member of the National Guard after being activated by a governor, but is not eligible for a military deferment.
With discretionary forbearance, the lender or servicer can decide whether or not to grant the forbearance. A borrower may request discretionary forbearance if experiencing an illness or financial hardship.