Both deferments and forbearances allow borrowers to pause their student loan payments. Private student loans may consider deferments and forbearances to be synonymous, but there are important differences with regard to federal student loans.The difference between a forbearance vs deferment affects who is responsible for paying the interest on a federal student loan.
Of federal student loans in the Direct Loan program, a fifth to a quarter are in a deferment or forbearance, split about evenly between deferments and forbearances. More than 90% of deferments are for borrowers who have returned to college for additional degrees, such as graduate school, with only 8% of deferments (about 1% of borrowers) involving the economic or financial hardship or unemployment deferments.
Who Pays the Interest?
During a deferment, the federal government pays the interest on a subsidized loan, but not on an unsubsidized loan. During a forbearance, the federal government does not pay the interest on either subsidized or unsubsidized federal student loans.
During a deferment or forbearance, the borrower remains responsible for the interest on a private student loan.
Some private student loans offer a partial forbearance during which the borrower makes interest-only payments. This prevents the loan balance from increasing.
If the interest is not paid as it accrues, it will be capitalized by adding it to the loan balance. On federal student loans, the interest is added to the loan balance at the end of the deferment or forbearance period. On private student loans, the interest may be capitalized more frequently.
Types of Deferments and Forbearances
There are several different types of deferments and forbearances.
Deferments include the in-school and grace period deferments, a graduate fellowship deferment, a rehabilitation training program deferment, the unemployment deferment, the economic hardship deferment, the cancer treatment deferment, the military service deferment and the post-active duty student loan deferment. The graduate fellowship deferment is not available during medical or dental internships or residencies.
The cancer treatment deferment is unusual in that the federal government pays the interest on both subsidized and unsubsidized federal student loans while the borrower is receiving active cancer treatment and for six months afterward.
Forbearances include mandatory forbearances when the borrower is serving in AmeriCorps, when the borrower is teaching in a national need area and when the borrower is in a medical or dental internship or residency. There is also a mandatory student loan forbearance when the borrower’s federal student loan payments equal or exceed 20% of the borrower’s monthly income. Mandatory forbearances must be given when requested by the borrower.
Borrowers can also request a general or discretionary forbearance if they are having trouble making payments.
Mandatory forbearances may also occur in administrative situations, such as a change in loan servicer or when approval for a deferment is still pending. In other cases, an administrative forbearance is at the discretion of the lender or servicer. For example, a private lender may place some of your student loans in a hardship forbearance if they do not qualify for deferment.
In March 2020, all federal student loans owned by the Department of Education were automatically placed in administrative forbearance. This was part of the government’s COVID-19 relief effort, included in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Loan payments are scheduled to resume on February 1, 2022.
General Eligibility Requirements
Many deferments and forbearances have specific eligibility requirements, often depending on the borrower’s activities or financial circumstances. But, there are also several general eligibility requirements that apply to all deferments and forbearances.
In particular, the borrower must not be in default on his or her federal student loans. Borrowers who are in default on their student loans lose eligibility for deferments and forbearances. So, it is best to exhaust eligibility for deferments and forbearances before defaulting on your federal student loans.
Forbearances may be requested by telephone, but written confirmation of the forbearance must be sent within 30 days. Wait until you get written confirmation of a deferment or forbearance to stop making payments on your student loans. Otherwise, your student loans might go into default if the deferment or forbearance was not approved or the paperwork was lost.
To apply for a deferment or forbearance, contact the lender or loan servicer.
Strategy for Using Deferments and Forbearances
Since interest may continue to accrue during a deferment or forbearance, it is usually better to continue making payments on the student loans. The capitalized interest causes the loan to grow during the payment deferral, making it more difficult for the borrower to repay the debt after the deferment or forbearance than before.
For the same reason, deferments and forbearances should be used when the borrower’s financial difficulty is short-term. The added interest from a few months of deferment or forbearance won’t increase the size of the loan by much. But, a long-term period of non-payment, especially if the borrower stacks multiple deferments and forbearances or uses consolidation to reset the clock on 3-year deferments and forbearances, can significantly increase the amount of debt.
Borrowers who are in a medical or dental internship or residency are no longer eligible for the economic hardship deferment, so their main options are forbearances and income-driven repayment plans. Not only can an income-driven repayment plan with non-zero monthly payments prevent the loans from growing too large, but an income-driven repayment plan may be a better option than a forbearance if the borrower intends to qualify for public service loan forgiveness.
Deferments and forbearances are best used as a last resort alternative to default.
Refinancing Student Loans
Borrowers may be able to lower their monthly payment by refinancing their student loans. Refinancing allows you to pay off your current loan with a new loan with a new loan term or interest rate. However, if you have a federal student loan you can only refinance into a new private student loan. Since your new loan is a private loan, you will no longer be eligible for federal benefits, such as flexible repayment options and federal student loan forgiveness programs.