In Repayment - ChangEd

The Difference Between Deferment and Forbearance

Deferment vs. Forbearance

Our financial situations are always changing. One moment you're on top of your payments with bills and loans, and then something happens, and it becomes much more difficult to stay on top of it all. When hardships start to creep in, you might try to look into pausing your student loan payments. This is where deferment and forbearance might come in handy. Right away, there are some qualifications you must meet to be eligible for this pause button. Only federal loan holders are going to qualify for either forbearance or deferment, most private loans don't qualify. You also can't be in default on your loan.

Deferment is delaying your monthly loan payments. They are often given in six-month periods, giving you some time to get your finances in order. For subsidized student loans, during your deferment period there will be no interest added. Unsubsidized loans are handled a little differently, as the interest still adds on to your loan. You can still pay the interest during your deferment period, so it's not added onto your principal, but you're not forced to do so. To apply for deferment, you must contact your servicer and, according to Federal Student Aid, must meet one of the following eligibility requirements:

You are enrolled at least half-time in post-secondary school.
You are enrolled full-time in an approved graduate program.
You are disabled and enrolled in an approved rehabilitation training program.
You are on active duty with the military, or you have been on active duty with the military within the last 13 months.
You are unemployed or unable to find full-time employment. This type of deferment is limited to three years.
You are experiencing economic hardship, as defined by federal regulations. This type of deferment is also limited to three years. Peace Corps service is covered by this circumstance.

Forbearance is similar in that it allows you to pause your monthly payments. It becomes an option when you don't qualify for deferment. Forbearance allows up to 12 months of paused monthly payments but has one big difference. The biggest difference between forbearance and deferment is that interest will still accumulate during the forbearance period for both subsidized and unsubsidized loans. Federal student loan servicers also have mandatory forbearance, where they're required to offer you forbearance. Federal Student Aid lists eligibility for mandatory forbearance as:

You are serving a dental or medical internship and have an eligible loan.
You are serving in AmeriCorps and have an eligible loan.
You are activated as a member of the National Guard but do not meet the requirements for military deferment.
You are teaching in a capacity that could qualify you for teacher loan forgiveness.
Your monthly payments for all student loans have been at least 20 percent of your gross monthly income for up to three years.

Both are good options in case you get too in over your head, which can happen. Sometimes big expenses come around or major things happen in our lives that make it difficult to keep making regular payments on student loans. Look into these if you qualify to help manage unexpected financial hardships. Options like these and other repayment plans, like income-driven repayment, can be the life preserver when you feel like you're drowning. Speak with your loan servicer or lender to figure out the best plan to take.

The Difference Between Consolidation and Refinance

Consolidation

Consolidation is a good option for borrowers who have multiple federal student loans. In that case, you might consider grouping all your loans into a Direct Consolidation Loan. This way, you have one loan to make payments to rather than multiple payments and loans to keep track of. Consolidation can be a great way to de-stress your life and make it seem a little less hectic. Consolidation averages all your loan rates, but if you have private student loans, you won't qualify for consolidation. You also won't be able to put your focus on a single loan, say the one with higher interest that might be more important to pay off first. If you have good credit and employment, refinancing could be a better option to get a lower interest rate as well as lower payment plans.

Refinance

Refinancing your student loan could be a lifesaver for some. Refinancing is the process in which a borrower can get a new loan with possibly a lower interest rate and a more manageable repayment term through a private lender of their choice. Refinancing your loan is eligible for anyone with both federal and private student loans. It's similar to consolidation in that you'd be combining all your loans, but you must be aware of a few differences and similarities. Refinancing your loan goes through a private lender, meaning you'll be taking out a private loan. So, if you have a federal loan that you are refinancing, you will lose the perks of that loan like income-driven repayment plans, federal loan forgiveness, and federal deferment or forbearance. To be eligible for refinancing usually requires a good credit score, so you'll want to make sure that your credit score is solid. Refinancing has huge benefits when it comes to saving on interest over time. By refinancing, you can get a lower interest rate, which means you save money that can go toward your principal and get out of debt quicker.

The Difference Between Default and Delinquency

Default vs. Delinquency

Paying off student loans won't always be easy. When you graduate, you have things to focus on and paying your student loan might fall to a lower priority on your list. Things come up and finances get tight, so you may fall behind on a payment. After your first missed payment, your loan will become delinquent. It only takes one missed payment to become delinquent. The only way to get out of delinquency is to make the payment you missed or to explore options with repayment plans or deferment/forbearance.

For federal loans, you'll have 270 days until your loan goes into default and 120 days for private loans. But defaulting on your loan isn't something you want to do, as it has serious consequences. Consequences for defaulting include incurring major fees, affecting your ability to get a job, destroying your credit score (both yours and any cosigner), and being sued for collection of payments. You can also lose any chance for repayment options or assistance. All these things seem extremely harsh, but it's meant to keep you aware of the importance of staying on top of your payments.

If you feel like you may be falling behind on payments and are becoming overwhelmed, look into different payment plans and consolidation. For private loan holders that don't have those options, talk to your lender. They will often have their own options for financial hardships. The most important thing is to not ignore your student debt. There are options to explore if you feel like you're drowning. If you're someone who's entering default or delinquency, remember you're not alone! A lot of people feel like they're losing the battle to student loans, you just have to take the steps to not fall too far behind.