Deferment and forbearance are two options available to borrowers who are struggling to make payments on their student loans. While both provide temporary relief by allowing you to pause or reduce your payments, they differ in terms of eligibility, interest accrual, and the long-term impact on your loan. Understanding the main difference between deferment and forbearance is crucial for managing your student loans effectively.
Definition of Deferment
Deferment is a temporary pause on student loan payments, often granted based on specific qualifying circumstances, such as enrollment in school, unemployment, or economic hardship. During deferment, payments are postponed, and the borrower is not required to make monthly payments for a set period.
- Key Characteristics:
- Eligibility: Deferment is typically available to borrowers who meet specific criteria, such as being enrolled at least half-time in an eligible school, facing economic hardship, or serving in the military.
- Interest Accrual: For subsidized federal student loans and Perkins Loans, interest does not accrue during deferment. For unsubsidized loans, interest continues to accrue, and borrowers may choose to pay the interest or have it added to the principal balance.
- Application Process: Borrowers must apply for deferment and provide documentation to prove eligibility. The servicer must approve the request before deferment begins.
- Impact on Credit: Deferment does not negatively impact your credit score, as long as you continue to meet the loan’s requirements.
- Examples:
- A borrower who returns to school may qualify for in-school deferment, postponing payments until they graduate or drop below half-time enrollment.
Definition of Forbearance
Forbearance is another temporary option for pausing or reducing student loan payments, typically used when a borrower is facing financial difficulties but does not qualify for deferment. Unlike deferment, interest accrues on all types of loans during forbearance, including subsidized loans.
- Key Characteristics:
- Eligibility: Forbearance is generally granted at the discretion of the loan servicer, based on the borrower’s financial situation or other qualifying factors, such as illness or financial hardship.
- Interest Accrual: Interest accrues on all federal and private student loans during forbearance, regardless of the loan type. Borrowers can pay the interest as it accrues or have it capitalized (added to the principal balance).
- Application Process: Borrowers must request forbearance from their loan servicer, who has the authority to approve or deny the request. In some cases, forbearance may be granted automatically.
- Impact on Credit: Like deferment, forbearance does not negatively impact your credit score if you continue to meet the loan’s requirements, but the increased interest can lead to a higher loan balance over time.
- Examples:
- A borrower experiencing a temporary financial hardship, such as job loss, may request forbearance to reduce or pause their loan payments until their situation improves.
Core Differences
Interest Accrual
- Deferment: Interest does not accrue on subsidized loans during deferment, but it does accrue on unsubsidized loans.
- Forbearance: Interest accrues on all loans, both subsidized and unsubsidized, during forbearance.
Eligibility
- Deferment: Requires meeting specific criteria, such as enrollment in school, economic hardship, or military service.
- Forbearance: Available to borrowers facing financial difficulties, generally granted at the discretion of the loan servicer without needing to meet strict criteria.
Financial Impact
- Deferment: May be more financially advantageous for borrowers with subsidized loans, as it prevents interest from accruing on these loans.
- Forbearance: Can result in higher overall loan costs due to interest accruing on all types of loans, leading to a larger balance if the interest is not paid during the forbearance period.
Core Similarities
Temporary Relief
Both deferment and forbearance provide temporary relief from student loan payments, allowing borrowers to pause or reduce payments during times of financial difficulty.
Application Process
Both require borrowers to apply through their loan servicer, and approval is necessary before the relief takes effect.
Comparison Table
| Feature | Deferment | Forbearance |
|---|---|---|
| Interest Accrual | Does not accrue on subsidized loans; accrues on unsubsidized loans | Accrues on all loans, regardless of type |
| Eligibility | Specific criteria (e.g., in-school, economic hardship, military service) | Discretionary, based on financial hardship or other circumstances |
| Financial Impact | Can be less costly for borrowers with subsidized loans | Can result in a higher loan balance due to accrued interest |
| Application Process | Requires application and approval | Requires application and approval, or may be automatic |
| Temporary Relief | Yes | Yes |
| Impact on Credit | No negative impact if requirements are met | No negative impact if requirements are met |
Pros and Cons
Deferment
- Pros:
- Interest does not accrue on subsidized loans, reducing the total cost of the loan.
- Provides a structured way to pause payments during qualifying situations, such as returning to school.
- Cons:
- Limited to specific qualifying situations, so not all borrowers will be eligible.
- Interest still accrues on unsubsidized loans, increasing the balance if not paid.
Forbearance
- Pros:
- More accessible to borrowers who do not meet deferment criteria, offering relief during financial hardship.
- Provides flexibility in managing payments during difficult times.
- Cons:
- Interest accrues on all loans, leading to a higher loan balance if the interest is not paid during the forbearance period.
- Can significantly increase the total cost of the loan over time.
Use Cases and Scenarios
When to Choose Deferment
- In-School Status: If you return to school and meet the enrollment requirements, deferment is an ideal way to pause payments without accruing interest on subsidized loans.
- Economic Hardship: If you qualify for an economic hardship deferment, it can offer financial relief without increasing your loan balance as much.
When to Choose Forbearance
- Financial Difficulty: If you’re experiencing financial difficulties but don’t qualify for deferment, forbearance provides a way to temporarily reduce or pause payments.
- Health Issues: Forbearance is a good option if health issues or other personal circumstances prevent you from making payments.
Summary
In summary, the main difference between deferment and forbearance lies in how interest accrues and the eligibility criteria. Deferment is typically more advantageous for borrowers with subsidized loans because interest does not accrue, making it a less costly option. However, deferment requires meeting specific criteria. Forbearance, on the other hand, is more broadly available and easier to qualify for, but interest accrues on all loans, potentially leading to a higher overall loan balance. Both options provide temporary relief from loan payments, helping borrowers manage their finances during difficult times.
FAQs
Q: Can I apply for both deferment and forbearance?
A: Yes, depending on your circumstances, you may qualify for both at different times. However, you can only have one status (deferment or forbearance) active at a time.
Q: How long can I be in deferment or forbearance?
A: The length of time varies. Deferment may last as long as you meet the eligibility criteria, while forbearance is typically granted for up to 12 months at a time, with a cumulative limit.
Q: Does interest capitalization occur in both deferment and forbearance?
A: Interest capitalization occurs in forbearance if the accrued interest is not paid during the forbearance period. In deferment, interest on unsubsidized loans may be capitalized if it accrues and is not paid.
Q: Is deferment or forbearance better for my credit?
A: Both options can protect your credit by preventing missed payments from appearing on your credit report. However, deferment may be financially better if you qualify, especially if you have subsidized loans.
Q: Can I still make payments during deferment or forbearance?
A: Yes, you can make payments during deferment or forbearance, and doing so can reduce the amount of interest that accrues, lowering your total loan cost.
