Understanding Deferment & Forbearance for Student Loans

November 1, 2012 Category: College Scholarships and Grants

Going into a student loan situation, borrowers don’t always envision the possibility of not being able to afford their payments. However, smart borrowers know that the best way to tackle this type of financial aid obligation is to know the ins and outs of the entire process, including the scary “what if” scenarios.

Defaulting on student loans should be avoided at all costs and if a borrower isn’t properly informed as to what options are available them, it increases the odds of getting in over their heads, should an unforeseen circumstance occur that could affect their status of their loan.

Many people believe that lenders are ruthless and only care about getting their money back. The truth is that lenders are more than willing to work with borrowers to resolve any issues or disputes. Default is the last thing they want, which is why they’re open to negotiating terms and even finding more affordable solutions for borrowers having difficulty paying back their student loans.

Student LoansSo what is a person to do should they find themselves without a job, injured to the point where they can’t work/earn income or get ill? Instead of panicking, borrowers will want to reach out to their lender immediately to alert them to the situation.

Lenders have heard and seen it all so they completely understand that things happen beyond a person’s control. Because unforeseen circumstances aren’t uncommon, there are alternatives to avoid default–namely deferment and forbearance.

Deferment describes a process where a borrower is temporarily not required to make payments on the principal balance of their loan. The details of deferment varies from lender to lender, as well as what type of loan it is being applied to.

Students that have taken out subsidized loans (Federal Stafford Loan, Federal Perkins Loan, Direct Subsidized Loan) might even qualify to have the government pay the interest during the deferment period. This means students with unsubsidized loans, including PLUS loans, are not eligible for this perk. That means still being required to pay for the accumulating interest but not until after the deferment period has ended.

Student borrowers should never forget about the interest that accrues over time.

Forbearance is a solution that is typically applied in cases where a borrower isn’t able to make payments on time but doesn’t meet the eligibility requirements for being approved for a deferment. What forbearance and deferment have in common is the power to establish a time period where no payments need to be made. In the case of a forbearance, payments also have the option to be reduced.

However, where forbearance differs greatly is that the interest on the loan will still accrue, whether a student has a subsidized or unsubsidized loan, which means still maintaining responsibility for paying that part of the loan. The duration a forbearance is granted is usually for up to 12 months. Discretionary forbearance is granted to borrowers that have proof of financial hardship or illness that affects their ability to make payments. Mandatory forbearance comes with a much more rigid set of eligibility requirements.

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