Comparing Student Loan Deferment and Forbearance: Which Temporary Repayment Comfort Is Superior?
Navigating the world of student loans can be a complex task, especially when it comes to deferment and forbearance. Here's a breakdown of these two options, their eligibility criteria, and the differences in interest accrual.
Eligibility Criteria
Deferment is available under specific qualifying conditions, such as:
- Returning to school and maintaining at least half-time enrollment (automatic in-school deferment)
- Being on or recently returned from active-duty military service
- Unemployment and receiving unemployment benefits (up to three years)
- Enrolled in an approved rehabilitation program (vocational, drug, mental health, alcohol)
- Undergoing cancer treatment (until six months after treatment ends)
- Enrolled in an approved graduate fellowship program
- Experiencing financial hardship (receiving means-tested government benefits, working full-time below poverty income, or serving in the Peace Corps)
- Parent PLUS loan borrowers while their child is in school at half-time status
Forbearance, on the other hand, may be granted more broadly for temporary financial difficulties or changes in employment (general forbearance), and there are mandatory forbearances for qualifying service-related activities (such as teaching, AmeriCorps, National Guard). You generally must apply and provide documentation to your loan servicer.
Interest Accrual Differences
Interest accrual behaviour varies significantly between deferment and forbearance.
- Deferment: Interest does not accrue on Direct Subsidized Loans, Perkins Loans, and the subsidized portions of Direct or Federal Family Education Loan Consolidation Loans during deferment. For unsubsidized loans, interest will accrue and be added to the balance if unpaid. Thus, deferment is more financially beneficial if you have subsidized federal student loans because the government pays the interest during deferment.
- Forbearance: Interest always accrues on all types of federal student loans during forbearance, including subsidized loans, and this interest is added to your loan balance (capitalized) if unpaid. Therefore, forbearance generally leads to higher overall costs compared to subsidized deferment.
Key Takeaways
- Deferment eligibility is based on specific qualifying situations frequently related to schooling, military service, unemployment, or hardship.
- Forbearance is more flexible for temporary financial difficulties but requires application and may be granted for shorter or different qualifying scenarios.
- Interest does not accrue on subsidized loans during deferment, but it does during forbearance on all loans, making deferment financially preferable when available.
This distinction primarily affects federal loans; private loans usually always accrue interest during either deferment or forbearance.
- Student loan deferment is a better option than forbearance for those who qualify, as it does not accrue interest for subsidized federal student loans or Perkins loans.
- For private student loans in default, recovery options are more limited and may require working with a student loan lawyer on a student loan settlement or filing for bankruptcy.
- Most private lenders offer deferment programs for military or school enrollment, and forbearance for at least 12 months.
- Repayment options for federal student loans in default include loan rehabilitation and consolidation, but income-driven repayment, deferment, and forbearance are no longer options.
- If financial challenges are temporary, forbearance may be more suitable, as it allows one to put the money from student loan payments towards other bills and resume repayment later.
- When applying for forbearance or deferment, one must complete specific forms and provide documentation showing eligibility.
For a comprehensive understanding of your options and to make informed decisions, it's essential to research and consult with a student loan expert or lawyer when needed.
- A calculator app can be useful when navigating the intricacies of student loans, helping to compare deferment and forbearance options.
- In the realm of personal finance, understanding loans, insurance, saving, and investing is crucial for managing one's wealth and education.
- While deferment and forbearance are both means of postponing student loan repayment, their eligibility criteria, and interest accrual behave differently.
- Personal-finance experts often recommend deferment over forbearance for those who qualify, especially when dealing with subsidized federal student loans or Perkins loans.
- Banking institutions offer various loan products, including mortgages and credit facilities, in addition to student loans.
- For those experiencing temporary financial difficulties, forbearance may be more suitable, allowing them to allocate their resources to other bills while temporarily pausing student loan payments.
- When faced with default on private student loans, it may require consulting a student loan lawyer for assistance in exploring recovery options, such as student loan settlement or filing for bankruptcy.
- To make the most informed decisions about one's student loans and personal-finance options, it's essential to seek advice and insights from finance and education professionals.
