If you’re experiencing a financial hardship, you may request for a “deferment” or “forbearance” on your federal student loans, as long as the loan isn’t in default.
Both options entitle you to postpone making payments for a set period of time. But before deciding to put your loans into deferment or forbearance, it is essential to understand the difference.
Loan Deferment #
Deferment is a temporary suspension of loan payments during which you may not be responsible for paying the interest that accrues on certain types of loans such as federal “subsidized” loans or Perkins loans.
That is, the government pays the interest on your loan during a period of deferment.
Depending on your circumstances, payments are “deferred” in six-month intervals for up to three years. All other federal loans deferred will continue to accrue interest.
If you don’t pay the interest during deferment, it may be capitalized, added to your principal balance, and the amount you pay in the future will be higher.
Loan Forbearance #
Forbearance, on the other hand, allows you to suspend or reduce your loan payments for up to 12 months. However, regardless of whether your loan is subsidized or unsubsidized, all loans accrue interest during forbearance.
That is, you are responsible for paying the interest all of the time. Except in the case of certain forbearances, such as the one offered as a result of the COVID-19 emergency.
Here is an example of the impact of forbearance:
If your loan balance is $30,000 with a 6% interest rate and you enter forbearance for a year immediately after starting repayment, $1,800 in interest will accrue on your loan.
Any unpaid interest will be capitalized, or added to the principal of your loan, essentially increasing your total balance and requiring you to pay more in the long run.
Is deferment a better choice? #
Yes, if you're eligible, deferment is generally a better choice than forbearance. Unlike forbearance, interest doesn't continue accruing during deferment.
However, considering the implications of deferment and forbearance on interest and loan forgiveness, it is advisable to explore alternative repayment options like an income-driven repayment plan.
These plans determine your monthly student loan payments based on your income and family size. In certain cases, your payment amount could be as low as $0 per month.
Should I Refinance My Student Loans? #
As time passes since your graduation, it's probable that your annual income and credit history have improved. By refinancing your existing student loans you may see a dramatic reduction in your interest rate – even a few points.