Tackling Repayment: Deferment, Forbearance, and Other OptionsEmail This Article
Sometimes life events or unexpected circumstances can put a strain on your wallet, making it hard to make ends meet. If you find yourself in this situation, don’t panic! Direct Consolidation Loans have provisions in place for times like this. Let’s take a look at your deferment and forbearance options with federal student loans, and then we’ll look at what your options are if you’re looking for relief when it comes to your private loans.
TIP: Remember, student loan debt─even from a private lender─is extremely difficult to get discharged in bankruptcy. It’s best to work with your lender or loan servicer to keep your loan in good standing (especially if you think you might want to refinance with a private loan in the future). For more information on avoiding default, visit our article Help! I’m in Danger of Defaulting.
First, let’s get on the same page by defining the terms "deferment" and "forbearance" as they relate to the Direct Student Loan and Direct Consolidation Loan programs.
Deferment is a temporary suspension of student loan payments. You can have a subsidized or unsubsidized loan in deferment, but the government pays the interest on your subsidized loans during an authorized period of deferment.
Forbearance is a plan that temporarily reduces or suspends student loan payments. During forbearance, interest still accrues, even on subsidized loans. You are responsible for paying the interest on your loans while they are in forbearance.
They sound pretty similar. What’s the difference?
Deferment allows you to postpone payments and as long as you meet the criteria for the deferment (such as being in school on at least a half-time basis) you are entitled to use a deferment. During this time, you may choose to make interest payments if you are able. If you have a subsidized loan, the government will pay your interest during any authorized deferment period.
Now, let’s compare this to a forbearance. A forbearance is discretionary because it is up the lender to approve it. Borrowers typically don’t request forbearance unless they have exhausted their deferment options under the Direct Loan program, and are still struggling to make their payments. Unlike deferment, when a loan is in forbearance─even if it is a subsidized loan─you are still responsible for paying the interest. If you are unable to pay the interest that accumulates during the forbearance period, it will simply be added (capitalized) to your principal loan balance. This means your loan balance would be larger than when you started your forbearance, and that will also result in an increase to the overall amount of money you repay.
These programs are offered by the federal government to help you keep your head above water during hard economic times. These programs don’t apply to private loans, but there are some private lenders who offer assistance to help you get through difficult periods as well.
What are my options with private student loans?
Benefits and temporary relief programs offered by private lenders vary. When consolidating or refinancing a private student loan, your primary financial relief will come from a reduction in interest rate, or an extension on your repayment period to lower your monthly payments─or both. Most lenders offer forbearance for hardships but the policies will be different from lender to lender, including how much time you may qualify to use. Some lenders also offer optional unemployment protection provisions to help keep you out of default while you search for a new job.
If you are a cosigner looking for relief, refinancing may allow you to remove your name from the loan, absolving you of responsibility. You may also experience an additional reduction in your interest rate if you or the borrower enrolls in an auto-debit discount program.
When looking to consolidate or refi with a private loan, allow yourself a little time to shop around and explore the benefits offered by different financial institutions. Our Lenders page conveniently highlights the program advantages of several lenders offering private student loan refinancing.