Recent statistics suggest that the typical graduate from college emerges with just under $40,000 in unpaid loan monies. In fact, a full 60 percent of borrowers state they can’t even project when they might be able to pay back their student loans.
Not surprisingly, student loan deferment and student loan forbearance are popular topics in this worrisome financial climate. If you are one of the estimated 40 million graduates who owes a percentage of the $1.2 trillion in outstanding debt, this article will offer insight into these two debt management tools and how they might be able to provide some relief.
Student Loan Deferment
What is Student Loan Deferment?
The concept of a loan deferment is simple. For a period of time, you will be granted a break from paying back either the principle or interest on your student loans.
Types of Student Loan Deferment
The way deferment works depends largely on what type of student loan you have. If you have any of these types of loans, the federal government may step in to pay accruing interest on your loan principle during your deferment period:
- Federal Perkins loan.
- Federal Stafford subsidized loan.
- Direct federal subsidized loan.
However, if you have a student loan that is unsubsidized, you will be responsible for paying both the principle and accrued interest on your loan after the deferment period ends. In this case, it can be better to at least pay the accrued interest even during your deferment if you can manage it.
Before making a decision about whether or not to pay the accrued interest during the deferment period, ask your lender if the unpaid interest will be added to your principle or not. If so, this can raise the total amount you owe.
Regardless of the type of student loan you hold, you can qualify for deferment if you meet any of these conditions:
- You are currently enrolled part-time or full-time in postsecondary school (trade school, college, graduate school).
- You are attending an approved graduate program.
- You are disabled and are attending an approved rehab and training program.
- You are not able to find employment (for three years or less).
- You have served as active duty military during the last 13 months or are still currently serving in this capacity.
Each lender will have their own loan deferment application process. It is critical to continue paying what you owe on your loan until you receive approval.
Pros and Cons of Deferment
Deferment is not an option to consider lightly. However, under the right circumstances, a loan deferment can make a real difference in your financial situation.
Pros of deferment:
- You can get a break from the burden of paying down student loans.
- If you have a subsidized loan, the federal government will pay your interest during the deferment period, lowering the overall amount you personally must repay.
- You can avoid black marks on your credit from being delinquent with payments or defaulting on your student loan.
- The deferment will not impact your credit score.
Cons of deferment:
- You have to fill out the application paperwork, which can be time-consuming.
- Your break is brief, meaning you will need to mobilize to ensure you can resume repayments on schedule.
- For unsubsidized loans, the accrued interest can mean you end up owing more than you would have without taking a break from payments.
Student Loan Forbearance
What is Student Loan Forbearance?
In its simplest form, a student loan forbearance is a longer version of a loan deferment. In this case, your break from making loan payments can last for up to 12 consecutive months. As well, as with deferments, your unpaid interest will continue accumulating during the break period.
Types of Student Loan Forbearance
As with loan deferments, it is important to get to know your lender since there is more than one type of forbearance. The two main types of forbearance include:
As the name suggests, the first is a break your lender is required to grant you so long as you meet all of the criteria for eligibility. There are a number of situations under which your lender must give you a mandatory forbearance:
- You are in the military.
- You are in a residency or internship for medical or dental school.
- Your monthly loan repayment (principle plus interest) is 20% or more of your monthly gross income.
- You currently hold a national service position as part of receiving a national service award.
- You are a teacher in a program that qualifies for educator loan forgiveness.
- You can qualify for the U.S. Department of Defense Student Loan Repayment Program.
- You belong to the National Guard and are currently serving on active status without the option of deferment.
The second type of loan forbearance can be granted to you at the discretion of your lender. Here, you only have two options to qualify:
- If you are ill.
- If you are experiencing financial hardship.
Each individual lender will have their own application process that can take some time to be approved. So, it is important that you continue paying down your loan monthly to the best of your ability until you hear that your application has been approved and its start date.
Pros and Cons of Forbearance
As with loan deferment, there are both pros and cons to applying for loan forbearance, and it is something to consider carefully.
Pros of forbearance:
- You can receive up to 12 months of breathing room to get your finances in order.
- The forbearance will not impact your credit score.
- You can sidestep the risk of becoming delinquent on your payments or defaulting on your student loan.
- Forbearance (especially mandatory) is usually easy to receive.
Cons of forbearance:
- You will have to complete the lender’s application process, which may be paperwork-intensive.
- If you choose not to pay at least the accrued interest during your forbearance period, you will end up owing more principle with additional accrued interest afterwards.
- You will need to plan carefully to ensure you are able to resume repayments on schedule.
Short and Long Term Effects
In the bigger picture of managing finances post-graduation, the overall effect of both deferment and forbearance is ultimately a positive one.
This is because neither impacts your credit score, and because using either at the right time can help you avoid going into delinquency or defaulting on your loan.
Who is Eligible for Deferment or Forbearance?
Technically, anyone who holds a federal student loan and can meet the criteria is eligible to apply for a deferment or forbearance. However, as noted here, it may be up to your lender whether or not to approve your application.
Who Can Benefit the Most?
If you are experiencing personal financial duress, any break from making loan repayments will be a huge relief as well as an aid to replenishing your bank account. Ultimately, this is why both tools are there to serve those who need them.
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