It’s a scary moment when you realize that you can’t make a payment on your student loans. Maybe you graduated from college and your grace period ran out before you were able to get a job; maybe you’ve got a job that just doesn’t pay enough; maybe you’ve just had a slate of emergencies eat into your ability to pay. Whatever the case, you’ve got options at your disposal.
In addition to income-based repayment plans, which can drastically lower your student loan bill, deferment and forbearance can help you get back on your feet.
Deferment and Forbearance: The Similarities
At their core, deferment and forbearance are essentially the same thing: A period of time where you don’t need to make payments on your student loans. During this period of time, your student loans will continue to accrue interest, but you do not need to make payments. Federal loans offer deferment and forbearance as a matter of law, but private student loan servicers are not required to offer either.
If you’re brand-new to the world of student loans, you should take a look at our introductory guide that will help you understand all of the student loan basics.
Deferment and forbearance are meant to help borrowers get back on their feet during a financial crisis such as job loss. But it is important to note that in and of themselves, they do not save you money: In fact, they can end up being quite expensive.
If at the end of your deferral or forbearance you cannot afford to pay off the interest that has accrued, it will be capitalized (added to the principal). This means that over the life of the loan, you will wind up paying interest on the interest, which inevitably increases the total amount that you will repay.
As a matter of law, borrowers with Federal student loans are entitled to deferment so long as they meet certain eligibility requirements, which include:
- The inability to find work
- Economic hardship
- Enrollment in college
- Enrollment in the military, Peace Corps, or certain fellowship programs
Typically, you can defer your loans for a total of 3 years if you are unable to obtain work or are going through some kind of economic hardship.
Forbearance, on the other hand, is not guaranteed: It is granted at the discretion of your student loan servicer (this goes for federal and private student loans). The length of time that your loans can be placed in forbearance depends largely on the policy of your servicer; federal loans can usually be placed in forbearance for up to 12 months.
As stated above, interest will continue to accrue on your student loans during both deferment and forbearance, and if you cannot afford to pay off the interest that has accrued, it will be capitalized. But if you’ve got subsidized federal student loans (Perkins, Direct, or Stafford) then deferment is your best bet if you meet the eligibility requirements: Any interest that accrues on these loans during deferment is paid for by the federal government. Interest that accrues on subsidized loans during forbearance, though, is not paid by the federal government
Above All, Don’t Let Your Loans Become Delinquent
Delinquency occurs when you have failed to make payments on your student loans for a certain length of time (the length of time depends on your servicer). Delinquency triggers all sorts of negative consequences, such as the loss of certain protections and damage to your credit score, among others.
If you cannot afford to make your student loan payments, contact your loan servicer and see if you qualify for deferment, forbearance, or some other sort of reduced payment program. Simply ignoring the loans will not make them go away.
Can private student loans be deferred or placed in forbearance?
The short answer is, unfortunately, no. Deferment and forbearance are only guaranteed to borrowers of federal student loans (again, if you meet the eligibility requirements). That’s why, if you’re ever considering refinancing your federal student loans into a private student loan, you need to think long and hard: Doing so would mean you’re giving up these awesome safety nets.
That being said, most lenders will be lenient with borrowers who are facing economic hardship in the form of job loss. In these situations, most private lenders will offer you a month or two of voluntary forbearance to help you get back on your feet. During this time, you won’t be required to make payments, but your interest will continue to accrue. There’s no guarantee, though, so if you ever think you might not be able to make a payment, it’s in your best interest to call your lender as soon as possible to see what your options are.
There is also something called “administrative forbearance” that is available to student loan borrowers who have been impacted by a natural disaster such as a hurricane, tornado, earthquake, or something similar. Administrative forbearance is available by law, to all borrowers within a disaster zone, whether they are federal or private student loans, and typically lasts for 3 months from the date that the disaster was declared. Again, if you find yourself the victim of a natural disaster, it’s important that you call your lender and see what options are available to you: Don’t just assume that you’re covered!
Know Before You Agree
Deferment and forbearance can be powerful tools to help you get back on your feet during a period of unemployment or economic hardship, but the fact that they may increase the total amount of money that you owe should make you pause before you agree to anything.
Before agreeing to a period of deferment or forbearance, you need to make sure you understand what is going to happen to your loans during this time. Before agreeing to either option, make sure you ask your loan servicer the following questions:
- Will your loans continue to accrue interest?
- How might deferment or forbearance impact your future loan payments (Will the payments be higher due to capitalized interest that accrues)?
- How long is the period of deferment or forbearance?
- When can I decide to pay off the accrued interest before it is capitalized, if I am financially able to do so?