Forbearance and Deferment

There always has been two paths of relief for those having trouble making payments on their federal student loans: Deferment and forbearance.

Then, the coronavirus came slashing through the U.S. economy and a third route opened for borrowers needing relief making their student loan payments.

Deferment is a period of time when you are excused by your lender from making payments because of specific circumstances in your life like unemployment, economic hardship, returning to school, military deployment or serving in the Peace Corps.

If you do not qualify for deferment, your lender could grant you a forbearance that temporarily reduces or suspends payment on your student loans for up to 12 months.

A recent study by TransUnion, one of three major credit bureaus in the United States, shows more than half of student loans are in deferment.

Student Loan Assistance for Coronavirus Victims

COVID-19’s impact on paychecks was so swift and so severe that aid for student borrowers was the first area the federal government addressed when creating debt-relief options.

The Department of Education announced on March 20, 2020 that it would suspend payments on student loans. That policy was later extended through May 1, 2022.

The DOE is officially labelling that as forbearance. Borrowers with federal loans must reach out to loan servicers and request those terms.

Private debt collectors working for the government to chase delinquent accounts, were told to stop collection calls and letters.

If you have made payments on your federal student loans since the forbearance period officially began (March 13, 2020), you can get the money back. That’s right, you can get a refund on student loan payments made during COVID-19, and it’s actually pretty easy.

The COVID-19 Emergency Relief program offers an opportunity for borrowers to receive a refund on any payments made on Direct Loans owned by the Department of Education since March 13, 2020.

All you need to do is call the lender servicing your student loan and give them this information:

• The dates you made payments
• The amount of each payment
• How many of the payments you want refunded

Ask the loan servicing agent for the date you should expect a refund, then check your account that day to make sure the plan went through as approved.

Know the Difference

Though there are similarities in deferment and forbearance, there also are significant differences that should be considered before applying for either one.

• Both paths are temporary. Deferment can last up to 36 months and forbearance 12 months.
• Both programs are available for most federal loans, including Stafford, PLUS and Perkins loans. Private lenders are not obligated to offer either deferment or forbearance. If you have a student loan from a private lender, you must contact that lender directly to find out their program requirements.
• After applying for either deferment or forbearance, you must continue making payments on student loans until you have been notified that your request has been approved. If you stop paying and your request is denied, you will be delinquent and may default.
• If you are in default on your student loans – have not made a payment in 270 days – you are not eligible for either deferment or forbearance.

What Is Deferment?

This is typically the first route chosen when you decide you need help.

Depending on your circumstances, payments are deferred in six-month intervals for up to three years. It is expected that you will work toward improving your financial situation during that time or, if your loans are eligible, you will consolidate them into one affordable payment.

Most common deferment situations:

• Enrolled at least half-time in college
• Studying full-time in an approved graduate fellowship or rehabilitation training program
• Unemployed, unable to find full-time employment and registered with public or private employment agency
• Facing an economic hardship
• Active military service during a war, national emergency or military operation
• The 13-month period following conclusion of active duty

Your loan servicer will automatically place your loans in deferment if you re-enroll in college at least half-time or enroll in graduate school and they receive verification of the change in enrollment status. There is an option to continue paying and cancelling deferment, if you have the resources available.

Contact your loan provider to request a deferment and fill out the application. Be prepared to submit documentation proving your hardship.

What Is Forbearance?

If you do not qualify for deferment, you can apply for forbearance to discontinue or reduce amount of payments for up to 12 months.

There are two types of forbearance: Mandatory and discretionary.

Lenders are required to provide mandatory forbearance if:

• Your monthly loan payment is 20 percent or more of your gross monthly income.
• You are serving a medical or dental residency and you meet specific requirements.
• You are teaching in a program that qualifies for teacher loan forgiveness.
• You are serving in a national service position like AmeriCorps.
• You qualify for partial repayment under the U.S. Department of Defense Student Loan Repayment Program.
• You are called into active military duty.

Discretionary forbearance means you are the mercy of your lending institution. They must determine if you meet the standards because of financial hardship or illness. It is at their discretion to grant or reject forbearance.

Loans Affected and Interest

If you have a loan through the defunct Federal Family Education Loan Program (FFEL) or Direct Loan program, you may be eligible for deferment and forbearance. Some private loans are eligible, but it depends on the loan type and who services it.

Interest is charged on all loans during both deferment and forbearance, but who pays the interest can vary.

If you have a subsidized federal loan, the government will pay the interest during the deferment period, but not during forbearance. You are responsible for paying the interest on all other loans, whether it’s for deferment or forbearance.

You may make interest-only payments on the loan during the deferment or forbearance period, but if you don’t, the interest may be capitalized (added to your principal balance), increasing the amount you will pay in the future.

Will It Affect Credit Score?

One of the common misconceptions is that using deferment or forbearance will have a negative effect on your credit score. It will not.

Student loan deferment and forbearance will be noted in your credit reports, and neither will hurt your overall credit score.  However, your credit score will be affected if you are late or miss a payment prior to deferment or forbearance approval.