What is “Savoring” and How Can it Help You Build Wealth?
Student loans account for $1.5 trillion of debt with more than 44 million Americans owing money, making it the second-largest debt held in the US after mortgage. The average borrower graduates with more than $37,000 in debt, and more than 30% are struggling to keep up with payments six years after graduation. Not everyone can secure a stable job after graduation, and even if you have, your salary may not be as high as you expected. You may go into active duty or go back to graduate school. Many are the reasons to fall behind on your student loans, and unless you keep making payments - the interest will continue to accrue. So it comes as no surprise that many are trying to pause their student loan payments through deferment or forbearance.
When a borrower meets certain criteria she or he may be eligible for student loan deferment or forbearance, which means that they can stop making payments for a pre-specified period of time. This can be especially helpful when the borrower is going through financial hardships. By pausing their student loan payments they can allocate that money to cover other immediate expenses. Additionally, pausing the payments will help the borrower avoid defaulting on their loan if they are not able to make payments.
The main difference between deferment and forbearance is that you may not be responsible for paying the accrued interest on deferred student loans if you have subsidized federal loans or Perkins Loans - while on the other hand, you are responsible for paying interest on student loan forbearance, regardless of the loan type. They also differ on the duration of the on-hold period, student loan deferment can last up to three years, while student loan forbearance can last up to 12 months.
If you have subsidized federal loans or Perkins Loans, the deferment period will be interest-free because the government will pay for your accrued interest. However, if your loans are unsubsidized you will be responsible for covering the interest accrued on your debt. This can be dangerous because you risk end up paying a higher amount than originally signed.
During forbearance, you will be responsible for paying the interest that builds up on your debt, regardless of the type of loan. Student loan forbearance can be especially useful if you are going through a short-term difficulty and need to get out of a tough spot. You are allowed to make interest-only payments during this period - should you wish to avoid interest accumulating on your balance. When the forbearance period is over you can apply for a renewal.
To qualify for deferment you must meet one of the following criteria:
There are two types of forbearance: mandatory and discretionary.
Under mandatory forbearance, your loan servicer is required to grant you a forbearance period if you meet one of the following criteria:
In this case, the loan servicer will decide whether or not you qualify for forbearance. Discretionary forbearance is also known as general forbearance.
You can apply for general forbearance if you are not able to meet your monthly payments due to:
Entering into deferment or forbearance will not negatively impact your credit score, but it will be noted on your credit report. You should keep making payments until you receive approval, otherwise, if you miss a payment you may risk entering default on your loans and hurting your credit.
You must also take into account that since interest continues to build up on your balance, you may end up paying thousands more in debt once the deferment period is over - unless you had student loan deferment on subsidized federal loans or Perkins Loans.
It is for this reason that you must weigh in all your options when faced with the decision of whether or not you should pause your student loan payments, and you should take the capitalized interest into account when weighing your options.
If you are going through a financial crisis or a short-term emergency and you need to allocate money to other urgent expenses, requesting deferment or forbearance is a good way to stop making student loan payments and use that money to cover more important expenses while avoiding entering default on your loans.
If you expect the financial hardships to be for a long-term, you should consider switching to an income-driven repayment plan.
Learn more about income-driven repayment plans here.