Apr 20, 2015
There are certain student loan terms that it’s just assumed we understand. Terms that are frequently used in conversation, often without further explanation. “Deferment” and “forbearance” are two terms that student loan borrowers have heard thousands (if not millions) of times. But, has anyone ever explained what they mean? In simple english?
The clarity test
I have a little test for myself. A test I use to determine whether or not I truly understand a concept. Let’s call it the “clarity test.” If I can clearly communicate the concept out loud, to myself, without sounding like I’m lunging all over tarnation, then I probably have a decent grasp on it.
If, however, I start using terms like “you know,” “well you see,” “everyone knows,” or “see what had happened was” (these last two are very serious red flags), then I know, that I don’t know, and even worse, that I’m trying to convince myself that I do know something that I very clearly don’t.
(Given the number of of times I used the word “know” in the previous sentence you can see why I place a premium on explaining concepts to myself before I embark upon trying to explain it to anyone else.)
Anyway. When I tried to explain the difference between deferment and forbearance to myself, I thought I was on solid ground, but I very quickly found myself launching from side to side like I was on a really jerky carnival ride.
Didn’t pass the clarity test.
Just in case you and I are in the same boat, I decided it was time for a blog post fleshing out the difference between deferment and forbearance. Let’s start with deferment.
What does deferment mean?
When I hear the word “deferment” I think about putting something off. Problem is, when I hear the term “forbearance” I think about someone else clenching their teeth while they deal with my putting something off. But difference between deferment and forbearance in the context of student loans couldn’t possibly boil down to teeth clenching, so let’s dig a little deeper.
According to Federal Student Aid, deferment is:
“A postponement of payment on a loan that is allowed under certain conditions and during which interest does not accrue on Direct Subsidized Loans, Subsidized Federal Stafford Loans, and Federal Perkins Loans. All other federal student loans that are deferred will continue to accrue interest. Any unpaid interest that accrued during the deferment period may be added to the principal balance (capitalized) of the loan(s).”
I can identify five main components in this definition of deferment:
#1 Payments are postponed
#2 Specific conditions must be satisfied to qualify
#3 Interest does not have to be paid if it’s a Direct Subsidized Loan, Subsidized Federal Stafford Loan or Federal Perkins Loan
#4 The borrower is responsible for interest that piles up if it’s any other type of federal loan
#5 Any interest that isn’t paid during deferment can be lumped into the unpaid principal loan balance
Okay. So when we’re talking about the deferment of federal loans, we’re focusing on circumstances where borrowers can qualify to put off repayment and, depending on the type of loan, avoid having to pay interest on the principal. Got it.
What does forbearance cover?
Federal Student Aid defines forbearance as:
“A period during which your monthly loan payments are temporarily suspended or reduced. Your lender may grant you a forbearance if you are willing but unable to make loan payments due to certain types of financial hardships. During forbearance, principal payments are postponed but interest continues to accrue. Unpaid interest that accrues during the forbearance will be added to the principal balance (capitalized) of your loan(s), increasing the total amount you owe.”
For the sake of consistency, let’s stick with five, and see if we can break down forbearance:
#1 It lasts for less than the overall repayment period
#2 The borrower doesn’t have to pay the full payment typically required
#3 The borrower would like to make payments but can’t because of money trouble
#4 Interest keeps piling up
#5 Any interest that wasn’t paid during the forbearance will be lumped into the principal
Alright. What I’m hearing is that forbearance covers a brief period of time when full-on repayment is suspended, but borrowers remain responsible for paying interest. Any unpaid interest gets lumped into the principal once the forbearance is over.
Things are getting clearer. Sometimes it helps when we can spot the similarities and differences between related terms, so let’s do that next.
Ways that deferment and forbearance are similar
Both deferment and forbearance involve putting off repayment to a later point in time. Also, you don’t just get either option, you have to meet certain conditions. What else? Interest can pile up and be added to the principal once the deferment or forbearance period is over (depending on the type of loan if we’re talking about deferment).
Two ways deferment and forbearance are different
Boiled down to the essentials, the two main ways that deferment and forbearance differ are: (1) qualifying, and (2) the accumulation of interest based on the type(s) of loan(s).
There is a nifty little chart on Federal Student Aid to help you determine whether you may qualify for deferment. Scroll further down that webpage, and you’ll learn more about forbearance, including that there are two types: (a) discretionary forbearance, and (b) mandatory forbearance.
Additional types of forbearance
Discretionary forbearance is payment postponement that your lender can choose to give because you are experiencing financial difficulty, or illness. In contrast, mandatory forbearances must be given by your lender if you qualify. According to Federal Student Aid, there six ways you can qualify for mandatory forbearance. I’ve paraphrased each way below:
#1 You’re in residency or an internship as part of medical or dental school (and meet additional requirements)
#2 Your monthly payments exceed your monthly income by 20% or more (and meet additional requirements)
#3 You’re a national award recipient and are serving in that capacity
#4 You qualify for teacher loan forgiveness because of teacher service
#5 You qualify for US Department of Defense Student Loan (partial) Repayment
#6 You’re in the National Guard and have been activated by your governor (but don’t qualify for military service)
One more thing that deferment and forbearance have in common
No one will read your mind, assume you want to be enrolled in a particular deferment or forbearance program, and then enroll you. It just doesn’t work that way. Even if you qualify!! So do some digging using the links in this post, and the links to additional resources I’ve posted below to see whether: (a) you qualify for either deferment or forbearance, or (b) you’re even interested in either deferment or forbearance in light of the pros (postponed payments) and cons (potential for bigger total loan repayment due to interest piling up and being lumped into your principal).
Links to help you with your next steps if:
You need help figuring out whether you have federal loans, private loans or a mix of both. –> Start with the CFPB’s (Consumer Financial Protection Bureau) helpful post and link to the National Student Loan Database System.
You have federal loans and need to track down your servicer(s). –> Start tracking down your student loan servicer using this information on Federal Student Aid.
Your student loan servicer (federal or private) isn’t communicating and you need help. –> File a complaint with the CFPB.