Deferment or an income-driven repayment (IDR) plan is preferable to forbearance. Forbearance for federal student loans takes two forms: general and mandatory. To avoid default, you must continue making required payments on your student loans until your forbearance application has been approved.
Key Takeaways
If you're having trouble repaying your loan as promised, requesting a loan deferment might help you temporarily pause or reduce payments. Plus, it can help you avoid late fees and damage to your credit.
Unless your loan servicer specifies otherwise, they will report your mortgage forbearance to the credit bureaus, which can lower your credit score because it shows a period when you weren't making mortgage payments.
Loan forbearance can impact your credit depending on how lenders report relief payments to credit bureaus. If payments are reported as delinquent, forbearance may harm your credit. However, many types of forbearance shouldn't hurt your credit.
Both deferment and forbearance allow you to temporarily postpone or reduce your federal student loan payments. The difference has to do with interest accrual (accumulation). During a deferment, interest doesn't accrue on some types of Direct Loans. During a forbearance, interest accrues on all types of Direct Loans.
Disadvantages of a Deferment Period
The overall loan balance is increased due to accrued interest. In some cases, borrowers are subject to additional fees. The borrower must prove they are experiencing financial hardship.
Some servicers will extend forbearance for as long as 12 months, or in some cases, even longer. You'll need to speak to the servicer to get approval for a second or extended forbearance period.
Deferrals are better than forbearances for people who know they can't make a lump-sum payment to pay off their missed payments during a forbearance. A mortgage payment deferral allows you to take those missed payments and put them at the end of your mortgage term to make your loan current.
With forbearance, you won't have to make a payment, or you can temporarily make a smaller payment. However, you probably won't be making any progress toward forgiveness or paying back your loan. As an alternative, consider income-driven repayment. You have a limited amount of forbearance available.
You may be eligible for this deferment if you receive unemployment benefits or you are seeking and unable to find full-time employment. You can receive this deferment for up to three years.
Deferred payment plans can be highly beneficial for borrowers. However, they also bring on a level of risk. Borrowers may overestimate their ability to pay back a loan over time or unforeseen circumstances may bring about a tough time repaying a loan.
In most cases, interest will accrue during your period of deferment or forbearance. This means your balance will increase and you'll pay more over the life of your loan. If you're pursuing loan forgiveness, any period of deferment or forbearance may not count toward your forgiveness requirements.
Forbearance is a process that can help if you're struggling to pay your mortgage. Your servicer or lender arranges for you to temporarily pause mortgage payments or make smaller payments. You still owe the full amount, and you pay back the difference later. Forbearance can help you deal with a financial hardship.
With the exception of subsidized federal student loans, interest and fees typically continue to accrue during deferment. This may cause your monthly payment to increase once the deferral period ends.
Student loan deferment and forbearance can both postpone your payments, offering immediate financial relief without jeopardizing your account. Deferment also typically pauses your interest, making it a better choice than forbearance.
No, deferred payments generally won't directly hurt your credit. When a creditor defers your payments, it can report your account's new status to the credit bureaus—Experian, TransUnion and Equifax.
If you qualify for deferment, you can request one for up to 12 payment periods under most circumstances. However, you cannot ask for these deferments consecutively. Once you apply for one, you should wait at least a year before you request another one.
Forbearance itself doesn't have a direct impact on your credit score, as long as you keep up with your payments as agreed (i.e., making reduced minimum payments or resuming regular payments once forbearance is over).
It is possible to sell your house during forbearance and buy a new one, but it's not necessarily easy. Although forbearance itself doesn't directly harm your credit score, the circumstances that led to it might have.
Sudden financial hardships can occur for many reasons, such as job loss, illness, disability, natural disasters, or divorce. When something affects your ability to make your mortgage payments, a forbearance plan can provide breathing room to get back on track.
The most common reasons are: travel or gap year, family commitments, sports or other commitments, bereavement, health etc. In this case, they should contact the admissions office of the college in question and explain clearly their reasons for deferring.
Disadvantages of a Deferred Payment Agreement
Interest is usually applied on a compound basis. This means you'll pay interest on interest already incurred, as well as the care fees. This route is likely to reduce the amount of inheritance you can leave.