One of the benefits of a federal student loan, as opposed to a private student loan, is the ability to at times not make payments and not be penalized. This can happen in a few different ways: deferral, forbearance or forgiveness. Now, if you are up to speed on the finer points of Oxford dictionary definitions, then you may immediately see the subtle differences between these terms. But for the rest of us…
Whether your student loan is in deferral or forbearance, the immediate effect is the same: For a temporary period of time, you are not required to make any payment on the loan. Your loan is still reported to the credit reporting agencies as being current. But here is where the roads diverge. Under deferral, interest on the loan may, or may not, continue to accrue while you are in deferral. It will depend on the specific type of loan. However, under forbearance, interest will almost always accrue during the period of forbearance. Got it?
Let’s start with the most favorable case. What are the loans that can be in deferral without interest accruing? The Department of Education has a list here, but the key word to keep in mind is “subsidized.” A subsidized student loan does not accrue interest when it is in deferral status.
The reasons for which a deferral could be granted are fairly straightforward:
- You are still in school, at least half-time.
- You are unemployed.
- Your income is very low.
- You are receiving means-tested public assistance, such as Temporary Assistance to Needy Families (TANF).
- You joined the Peace Corps or the military.
- You are enrolled in a rehabilitation training program, for example vocational training or rehabilitation treatment related to a mental health issue or substance abuse.
The length of a deferral can vary. For example, if the reason for the deferral is unemployment or economic hardship, then the maximum length of time would be three years. But deferrals for other reasons may last longer if the circumstance that led to the deferral lasts longer. You can defer an unsubsidized loan for the same reasons as above.
Forbearance works a bit differently. The reasons for requesting a general forbearance are broadly similar, although only rather vaguely described by the Department of Education: financial difficulties, medical expenses, a change in your employment circumstance. And there is a catch-all “other reasons acceptable to your loan servicer” category.
There is also something called mandatory forbearance. The difference between general and mandatory is this: If you meet one of the criteria for mandatory forbearance, the loan servicer must grant you the forbearance. It is not left to their discretion.
The criteria for mandatory forbearance include:
- Americorps service
- Medical or dental internship or residency
- Your student loan burden is very high, that is, the payment is more than 20% of your monthly gross income.
- You have been activated for National Guard duty.
- You are a teacher who would be eligible for loan forgiveness under the teacher loan forgiveness program.
- You qualify for partial student loan repayment from the Department of Defense.
You can read about these criteria in more detail here. Under forbearance, you also have the option to temporarily lower your payment. But again, remember that under forbearance, interest almost always accrues and so the loan balance will be higher when you resume payments unless you have elected to make interest payments during the period of the forbearance. Forbearance requests are made annually, and in total cannot exceed three years.
The decision to seek forbearance versus deferment for an unsubsidized loan may come down to how long you expect to need relief from loan payments. If your circumstance is one that may persist for an extended number of years, and it falls under a category that allows for more than three years of non-payment, then deferral may be the more appropriate choice.
The decision to defer or forbear is not one to take lightly. If you are considering either action to deal with tight cash flow, ask yourself if this is a temporary problem caused by a specific circumstance (such as a lost job, soon to be replaced). Or are you seeking a temporary pause in payments as a “solution” to a persistent budget shortfall? How will you accommodate the student loan payment in your budget when the deferral or forbearance period ends? If you do indeed decide that deferral or forbearance is the right answer, can you at least make interest payments during that period so that the loan balance does not balloon?
If your student loan payment is truly unaffordable and no amount of budget jujitsu is going to make it less so, then a better alternative to deferral and forbearance may be reducing your payment based on your income i.e. income-driven repayment programs. Every federal student loan borrower (not necessarily their parents) is entitled to apply for a repayment plan based on their income. It is possible that your payment under an income-driven plan may in fact be zero for a period of time. You could lower your payments under an income-driven program for just a few years as you are getting your feet planted firmly, and then increase your payments later.
Forgiveness — now that is yet another story. In the world of student loans, forgiveness comes in a few different flavors (forgiveness, cancellation, discharge), but the result is largely the same: the loan is closed and the borrower has no further obligation to make payments. As you might imagine, the circumstances under which a borrower can achieve this are limited, for example an illness or disability that makes it impossible for the borrower to earn a living, or death of the borrower. Any remaining balance on a student loan under an income-driven repayment plan is forgiven after 20 or 25 years, depending on the type of loan. As you have undoubtedly heard, there are also certain public service occupations that make you eligible for loan forgiveness after a period of ten years. (The ins and outs of the Public Service Loan Forgiveness program is a saga unto itself.) You should know that bankruptcy is very rarely an event that will lead to student loan forgiveness. The criteria for student loan forgiveness can be found here.
Here is another consideration: If you have set a goal to seek forgiveness under the Public Service Loan Forgiveness program in ten years, your ability to do so will be impacted by deferral or forbearance. In order to achieve forgiveness, you need to make 120 “qualifying payments”; every month that you are in deferral or forbearance, pushes back the date at which you can have your loans forgiven. (Just a side note: If, under an income-driven repayment program, your payment is set to zero dollars, these zero “payments” are still considered to be “qualifying payments.”)
Well, that was quite a journey wasn’t it? Here is the bottom line: No one should ever, ever have to default on their federal student loans. There are a multitude of programs available to prevent this from happening. The key is that a borrower who is in trouble must be proactive (and possibly persistent) in reaching out to their loan servicer to explore the options that are available before payments are missed. Once you are in default, the options for assistance from your loan servicer narrow dramatically. Yes, the different options are somewhat confusing. Yes, it is likely time consuming to have these conversations with the loan servicer. But the piece of mind that you will get in return will make it well worth the effort.
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