Do you want to pause your monthly student loan obligations? There are a few different options available to you:
|Income Driven Repayment Plan||Forbearance||Deferment||Enrollment in an Income Based Repayment Program|
|Temporary Postpone Payments||✓||✓||Sets payment to be affordable based on income (Can be zero if borrower does not earn enough)|
|Can Pause Interest (for 3 years)||X||✓||✓ (Note: this is only on subsidized portion of loans)|
|Can work for Private Student Loans (in limited cases)||✓||✓||X|
|Counts towards end of term loan forgiveness||X||X||✓|
|Long term solution||X||X||✓|
What is loan forbearance?
Forbearance pauses your student loan payments for a certain amount of time. If you are not in default yet but rather delinquent, forbearance might be a good option to seek as it would delay you from going into default. Sometimes, forbearance can leave borrowers in a worse financial position though as interest can pile up while the loans are in forbearance
What Happens to the Interest?
The US Government does not pay for interest during the forbearance period. That means all the interest will capitalize and be added onto the balance of your loan during the forbearance period. This can accrue very quickly thus forbearance is often not the best financial option for many debtors.
The only way to prevent the interest from accruing is to pay it while in forbearance (which clearly doesn’t help solve the problem of not being able to afford your loans!).
Who is Eligible for Forbearance?
If you have poor health or other personal issues, which affect your ability to make loan payments, the FFEL and Direct Loan programs allow forbearance. If the debtor is approved, forbearance will be granted one year at a time. It should be noted that there is no limitation to the number of years that the debtor can continue this forbearance for. Forbearance can either be mandatory or discretionary.
Mandatory forbearance means that the lender is obligated to grant the debtor forbearance. Federal servicers are required by law to provide forbearance under the following circumstances:
- You are a member of the national guard but are not eligible for a military deferment
- You are currently teaching at a qualify school and want to apply for teacher loan forgiveness
- If your monthly student loan payment exceeds 20% of your total monthly gross income
- You are in a medical or dental residency program
- You qualify for a partial repayment under the US Department of Defense Repayment Program
If you do not qualify for the above mandatory forbearance, the lender may grant you a forbearance based on their discretion. To take advantage of a discretionary forbearance program, you will need to contact your lender/servicer and explain why you feel that forbearance is needed in your situation. Most likely they will work with you and offer forbearance if a financial hardship exists or a serious illness that prevents you from working is proved.
How to request forbearance?
If you would like to check your eligibility for forbearance, contact your loan servicer and provide them with the information requested. If you are unable to receive forbearance, you may be eligible to modify your current repayment plan. But there may be a MUCH better option, consolidating your loans and enrolling in an Income Driven Repayment Plan. . .
What is Student Loan Deferment?
A deferment will postpone all student loan payments. Basically the principal and interest thereof are temporarily paused. This helps the borrower temporarily because when the deferment period ends they will be able to make their payments.
What Happens to the Interest of Your Student Loan During Deferment?
Under certain conditions this type of postponement will prevent interest from accruing on your loan while in the deferment period. No accruing interest is extremely important, as it allows the borrower to pause their loan while preventing the balance from growing. This interest accumulation is a difference between deferment and forbearance.
The US Government pays the interest on your loan during the deferment period if you have:
- Federal Perkins Loans
- Direct Subsidized Loans
- Subsidized Federal Stafford Loans
For any other loan types you would be responsible for paying back interest that accrues during a deferment period, including all unsubsidized federal student loans or PLUS loans. You would not be responsible for paying the interest while you are in the deferment, but the interest will capitalize and be added onto your principal balance that would need to be paid back once your deferment period is finished.
Am I Eligible for a Loan Deferment?
Eligibility for a deferment would be determined based on what type of loans you have along with your reason for the request of deferment. For example, if you are having an economic hardship you may be eligible for up to 36 months of deferment on your student loans. Additionally if the following circumstances exist, you may be eligible for a deferment if you:
- Are enrolled in college or a higher educational institution at least half-time
- Are studying in an approved graduate program or an approved rehabilitation training program for disabled people
- Unemployed or are unable to find full-time employment
- Are in a period of service qualifying for a Perkins Loan discharge/cancelation.
- Are on active duty
- Are back from active duty and 13 months or less has passed or until you return to enrollment at least on a half-time basis (whichever is earlier) if
- You’re a member of the National Guard or another reserve department
- You were called or ordered to active duty while enrolled at least half-time or within six months of being enrolled at least half-time
Additionally, if you borrowed under a Direct Loan or FFEL Program, and your loan was first distributed before July 1, 1993, you might be able qualify for deferment for the following situations:
- Teaching in a specific area (usually where there is a teacher shortage)
- Working in public service
- Being a working mother
- A parent has left
- Temporary disability
Want to check your eligibility for a deferment? If so, you will want to contact your loan servicer and explain to them why you need the deferment. They should then grant it to you based on your specific situation and eligibility.
Private Student Loans and Deferment/Forbearance is Possible
The ability to get a deferment or a forbearance for a private student loan depends completely on you specific loan documentation and your lender/servicer. Given recent regulatory pressure, private lenders have recently shown more willingness to negotiate some form of relief similar to a deferment or forbearance. If you are struggling with private student loan payments, you should definitely attempt to contact your lender to see what can be done. If they do show a willingness to help, make sure you get them to explain in simple terms EXACTLY what they are doing with the interest and principal balances so you don’t end up in a worse situation. For more information about options for those dealing with private student loans, click here.
Why might enrolling in an income based repayment program (IBRP) be more beneficial?
IBRP’s have similar benefits to forbearance but certain aspects are sometimes better for the borrower. First, your payment is based on what you earn. The new payment amount will not be higher than 10% of your discretionary income if you were a new borrower on or after July 1, 2014. If you had loans before this date then 15% of your discretionary income is used to calculate your payment. For many borrowers, they actually “pay” zero dollars if their discretionary income isn’t high enough to meet the minimum amount. You can find out more about an IBRP here.
While both deferment and IBRPs can pause the interest on a loan, the biggest and best difference between an economic hardship deferment and an IBR is that the IBR offers student loan forgiveness at the end of the term, where a deferment simply pauses the student loan. If a borrower defers their loans for three years due to being unemployed, when the deferment ends they will still have the same number of years(term) remaining on paying their loan when the deferment is over. In the IBR, the borrower could qualify for a $0.00 monthly payment while unemployed for as many years as the economic hardship continues (not capped at three years). The months during this economic hardship and $0.00 payment would count as an actual payment towards the loan and would diminish the term of the loan. At the end 25 years any remaining balance on the loan would be forgiven in full.