What is the difference between deferment and forbearance?
Deferment and forbearance are both financial tools that can help borrowers manage their student loan payments when they face financial difficulties. While they may seem similar, there are distinct differences between the two that borrowers should be aware of. Understanding these differences can help borrowers make informed decisions about how to handle their student loans.
Deferment
Deferment is a period during which a borrower is temporarily exempt from making loan payments. During a deferment, interest may or may not accrue on the loan, depending on the type of loan and the borrower’s eligibility. Here are some key points to consider about deferment:
1. Eligibility: Borrowers may be eligible for deferment due to a variety of reasons, such as enrollment in an eligible graduate or professional program, economic hardship, or unemployment.
2. Interest: Federal loans often have interest that accrues during a deferment period, while some loans may have their interest payments suspended.
3. Application: Borrowers must apply for a deferment through their loan servicer and provide the necessary documentation to prove their eligibility.
Forbearance
Forbearance is a temporary reduction or suspension of loan payments. Unlike deferment, interest typically continues to accrue on forbearance loans, and borrowers may be responsible for paying the accumulated interest when the forbearance period ends. Here are some key points to consider about forbearance:
1. Eligibility: Borrowers may be eligible for forbearance due to financial hardship, medical reasons, or other unforeseen circumstances.
2. Interest: Interest continues to accrue during a forbearance period, which can increase the total amount owed on the loan.
3. Application: Borrowers must apply for forbearance through their loan servicer and provide the necessary documentation to prove their eligibility.
Key Differences
The main difference between deferment and forbearance lies in the interest accrual and the eligibility criteria. Here’s a summary of the key differences:
1. Interest: Interest does not accrue on federal loans during a deferment period, while interest continues to accrue during a forbearance period.
2. Eligibility: Deferment is often available to borrowers who are enrolled in school, experiencing economic hardship, or facing other qualifying circumstances. Forbearance is available to borrowers who have exhausted their deferment options or are facing financial difficulties that do not qualify for a deferment.
3. Cost: While deferment can help borrowers avoid paying interest during a challenging time, forbearance can lead to increased debt due to the accumulation of interest.
Conclusion
Understanding the difference between deferment and forbearance is crucial for borrowers looking to manage their student loan payments. While both options can provide temporary relief, borrowers should carefully consider the impact of interest accrual and eligibility criteria when choosing between them. By making informed decisions, borrowers can minimize the long-term cost of their student loans and maintain financial stability.
