Student loans are a rather unique type of debt obligation, especially in terms of repayment flexibility. In addition to a handful of repayment plans you can choose from, you generally have the ability to postpone your student loan payments if you're facing tough financial times, or are otherwise unable to make your monthly payments.
The two ways federal student loan borrowers can do this are deferments and forbearances. While both give you temporary relief from your student loan payments, there are some key differences between the two in terms of benefits and qualifications. Here's a rundown of what you should know before applying for either one.
Deferments are tougher to get but might save you money
If you can't afford your student loan payments, a deferment is generally the better of these two options -- if you can get one.
Deferments can be offered for up to three years (longer if you're still in school), and suspend your obligation to make monthly loan payments. You may be eligible for a deferment if any of these situations apply to you:
- You're enrolled in school, on at least a half-time basis. This is known as an in-school deferment and usually happens automatically.
- You're in an approved graduate fellowship program.
- You're on active duty military service in connection with a war, military operation, or national emergency, or up to 13 months after serving in such a capacity.
- You're unemployed or can't find a full-time job.
- You're experiencing an economic hardship.
- You're serving in the Peace Corps. For these last three situations, the three-year maximum applies.
Deferments can be offered for most federal student loans, including but not limited to Stafford, PLUS, and Federal Perkins loans. However, private lenders do not typically offer deferments. And if you are already in default on your student loans, you're not eligible for a deferment (or a forbearance, for that matter).
Here's why a deferment is often the better option. If you have subsidized loans, the government will pay the interest on these loans during a deferment, but not a forbearance. Under any circumstances, interest will still accumulate on unsubsidized loans, unless you choose to make interest-only payments during your deferment or forbearance.
A forbearance has the same basic effect, and can be easier to get
A forbearance is generally the choice for people who cannot qualify for a deferment, but still feel that you cannot afford your loans. For example, if you've deferred your student loans during three years of unemployment, you would have exhausted your deferment availability, but could still potentially qualify for a forbearance.
The basic idea of a forbearance is the same as a deferment. During a forbearance, you are allowed to temporarily stop making monthly payments. You can also apply for a forbearance that reduces your payments, as opposed to eliminating them entirely.
In certain situations, student loan servicers are required to grant your request for forbearance:
- You're serving in a medical or dental internship or residency program (with certain requirements).
- Your student loan payment is 20% or more of your total gross income.
- You have employment that will qualify you for teacher loan forgiveness.
- You are serving in AmeriCorps.
- You serve in the National Guard and have been activated, but don't qualify for a military deferment.
- You qualify for partial repayment of your loans via the U.S. Department of Defense Student Loan Repayment Program.
In addition to these mandatory forbearances, you can also apply for a discretionary, or general, forbearance. This is what you would do if you don't fall into any of the categories above, and also don't qualify for a deferment, but are experiencing financial difficulties, prolonged unemployment, or another factor that prevents you from making your student loan payments.
It's also important to mention that if you apply for a deferment or forbearance, you're still responsible for making your loan payments until it goes into effect.
Will a deferment or forbearance hurt your credit?
The short answer is no. Despite the common misconception, a student loan deferment or forbearance doesn't have a negative effect on your credit score.
However, it will be noted in your credit report, and lenders may take this information into consideration when determining your ability to repay. For example, if you would ordinarily have a $400 monthly student loan payment, but you are under deferment for the next few months, a lender may count your future student loan payment obligation when figuring your debts.
Be sure you know your payment options
If you're having trouble making your student loan payments, it's worth checking if there's a repayment option that fits your budget before applying for a deferment or forbearance. With a variety of income-based repayment options, you may be surprised at how little you might have to pay if you aren't earning much.
For example, let's say that you're single and have $37,172 in student loan debt (the average for a recent graduate), and that your annual income is $25,000. Under a standard 10-year student loan repayment plan, you would owe $407 per month. However, under the Pay As You Earn plan, which limits your payment to 10% of your discretionary income, you would only have to pay about $58 per month. In some cases, if your income is low enough, your payment could literally be $0, so it's worth looking into. Additionally, with the PAYE plan, any remaining balance would be forgiven after 20 years of payments, so you'll get the clock started.
Also keep in mind that while a deferment or forbearance won't hurt your credit score, it won't help it like making regular payments will. Specifically, payment history is the number one contributor to your FICO credit score, so paying your student loans back rather than taking a deferment or forbearance can certainly have a positive impact on your credit.
Having said that, I completely understand that in many cases, even low income-based payments can be quite a burden. My point is simply that it's important to know all of your payment options and evaluate them before deciding to proceed.