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.
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:
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:
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.