Under certain circumstances, if a borrower is unable to make loan payments on time owing to temporary financial complexities, he/she may qualify for a period of forbearance or deferment. During this period, a debtor is temporarily allowed to reduce or postpone payments for the federal student loan availed. This helps in avoiding credit defaults to great degrees.
So, what exactly is a deferment or forbearance and under what circumstances a person is granted this discretion? This blog attempts to throw light on these interim repayment suspensions options to help readers understand the necessary requirements to qualify for such programs, if and when required.
Deferment: This option entitles a borrower having short-term problems in repaying federal student loan to postpone his/her monthly principal payment for an explicit period of time. The alternative enables a person to protect his/her credit for a given time. Besides, if a student entails Direct Subsidized Loans, he/she is further discharged from paying interests on the loan all through the deferment period. However, interest would be persistently charge don FFEL Unsubsidized as well as PLUS loans, which if not paid, would be capitalized at the conclusion of the deferment period.
A student, in general, may be eligible for a deferment if:
- He/she has put down his/her name at a qualified post- secondary school (at least half the time)
- He/she has completed a full-time course in a fellowship graduate program
- He/she was a part of an appropriate full-time rehabilitation program for people with disabilities
- He/she remained unemployed or was unable to acquire a full-time job for a maximum period of 3 years
- He/she is experiencing a certain kind of economic hardship as distinguished by the federal regulations for a maximum period of 3 years
- He/she is serving military operations or any other national emergency services before or after October 1, 2007, for a period greater than 180 days following the completion date of the qualifying service
- He/she has played an active role as a member of the U.S. armed forces or National Services for at least 50% of his/her time at a qualified school or institution
Forbearance: It is a period in which a borrower’s monthly loan instalments are either reduced or suspended temporarily. It is considered as a costly alternative due to the fact that the interest accrued on loan is not suspended for the given time. It is recommended to avail this option only after carefully exploring and evaluating other income-driven loan repayment plans. Besides, it is further advised that people applying for a forbearance option for a period of 12 months should, if possible, elect to exit the status, once their financial situation improves. An individual is granted a forbearance option if he/she meets any one of the requirements as mentioned below:
- If a debtor is not able to timely make the scheduled loan payments due to reasons involving, but not restrained
to, illness and financial hardships
- If a person is working as a dental or medical intern or is fulfilling a residency program and essentially meets certain specific requirements
- If the aggregate amount that an individual is obligated to pay every month for Title IV student loans he/she has received is greater than or equal to 20% of the gross monthly income for a consecutive period of more than three years
- If a borrower is working in a qualified AmeriCorps firm
- If a person is serving as a teacher in a capacity that qualifies for loan forgiveness requirements under the Teacher Loan Forgiveness Program
- If an individual is eligible for a partial repayment of loan underneath the Student Loan Repayment Program, which is administered by the country’s Defense Department
- If a debtor is actively participating in the operations of the U.S. armed forces
How Making Payments During a Forbearance or Deferment Period Makes Difference?
Managing loan payments with forbearance or deferment alternatives provides a grace period to the borrower. In deferment option, this greatly lowers the overall amount that needs to be paid over the entire span of loan life as interest is not charged during the grace period. And so, any loan payment made in this period reduces the total principal balance. Besides, even if an individual chooses to avail forbearance option and makes any payment during this period then as the interest commences to accrue, it would be based on a relatively lower balance. And so, the total interest required to pay on the loan reduces by a significant amount.
It is, therefore, recommended by the financial advisers, as a general thumb rule, to make payments in the deferment or forbearance period for it reduces both the principal balance as well as interest accrued on the loan.