Which Is Better: Forbearance Or Deferment?

Last updated Feb. 10, 2025 by Charles Zemub

As the world of student loans and financial aid continues to be a significant aspect of many individuals’ lives, understanding the options available when one is unable to meet their loan payments becomes crucial. For students and graduates alike, navigating the financial landscape is no easy feat, especially when repayments begin and life changes put pressure on one’s financial situation. Two options often highlighted in such circumstances are forbearance and deferment. While both are designed to provide temporary relief, they operate differently and suit varying needs. To determine which option is better, it is essential to examine the intricacies of each, understand their implications, and evaluate them based on individual circumstances.

Understanding Forbearance

Forbearance is a provision that allows borrowers to temporarily pause or reduce their student loan payments. It is designed to provide short-term relief for those facing temporary financial difficulties, such as unemployment or illness. During forbearance, loans continue to accrue interest, regardless of whether they are subsidized or unsubsidized. This interest is then capitalized, meaning it is added to the principal balance at the end of the forbearance period, resulting in a larger overall debt.

Key Considerations for Forbearance

1. Interest Accumulation: As mentioned, all loans under forbearance accrue interest. This is a critical factor for borrowers to consider, as it means your total debt will increase during the forbearance period.

2. Flexibility: Forbearance tends to offer more flexibility in terms of eligibility requirements and is often easier to qualify for compared to deferment. This makes it a more accessible option for many borrowers.

3. Duration: While there is a general limit to how long you can be in forbearance (usually capped at 12 months at a time for federal loans), this period can be extended under special circumstances. It’s crucial, however, to remember that extending forbearance means incurring more interest.

4. Use Cases: Consider forbearance if you’re facing short-term financial issues. It might not be the best long-term strategy due to the cost implications of accumulating interest.

Understanding Deferment

Deferment is another option for postponing student loan payments, but it is distinct from forbearance in several key ways. During deferment, the government may pay the interest on certain types of federal loans, such as Direct Subsidized Loans and Perkins Loans, effectively freezing the amount owed. This significant difference makes deferment potentially more advantageous for those who qualify.

Key Considerations for Deferment

1. Interest Moratorium: Unlike forbearance, if you have certain types of federal loans, interest does not accumulate during deferment. This ensures that your loan balance remains unchanged, making it an attractive option for those who qualify.

2. Eligibility: Deferment typically has stricter eligibility requirements. Situations that may qualify you for deferment include being enrolled in school at least half-time, unemployment, economic hardship, or military service.

3. Duration: Depending on the type of deferment and eligibility criteria, deferment periods can range from a few months to several years.

4. Use Cases: Deferment is more beneficial if you anticipate being in a financially tight spot for an extended period, especially if you have subsidized loans and meet the strict eligibility requirements.

Forbearance vs. Deferment: A Side-by-Side Comparison

1. Cost Implications

• Forbearance: Costs more due to accrued interest; can result in a larger debt over time.
• Deferment: Can potentially cost less, especially with subsidized loans, as interest may not accrue.

2. Eligibility Requirements

• Forbearance: Easier to qualify for; beneficial for short-term relief.
• Deferment: Stricter requirements; beneficial for specific situations like returning to school or economic hardship.

3. Duration and Flexibility

• Forbearance: Typically shorter, with easier renewability.
• Deferment: Potentially longer and tied closely to life events, like attending school.

4. Best Suited For

• Forbearance: Short-term financial challenges.
• Deferment: Longer-term financial challenges and specific eligibility circumstances.

Making an Informed Decision

Deciding between forbearance and deferment requires a careful evaluation of your financial circumstances, the type of loans you have, and your long-term financial strategy. Here are some questions to ask yourself when making this decision:

• Do you qualify for deferment? If you meet the criteria for deferment, especially with subsidized loans, this may be the better financial choice.
• Is your financial difficulty temporary? If yes, forbearance might be an easier and effective option despite interest costs.
• What is the impact of interest capitalization on your debt? Understand how accrued interest will affect your repayment and weigh this against your current financial needs.
• Do you anticipate your situation changing soon? Consider the duration you may need relief and choose accordingly.

The choice between forbearance and deferment is personal and depends largely on individual circumstances. Consulting a financial advisor can provide additional clarity and guidance based on your specific financial scenario.

FAQs

What is the primary difference between forbearance and deferment?

The main difference lies in how interest is handled. In forbearance, interest accrues on all loans, increasing your total debt. In deferment, interest does not accrue on certain types of subsidized loans, which can prevent your debt from growing.

Which option is easier to qualify for?

Forbearance generally has fewer eligibility requirements, making it more accessible for those facing short-term financial challenges.

Can I renew forbearance or deferment?

Both deferment and forbearance can be renewed, but they often come with caps on the length of time you can use them. It’s important to check with your loan servicer for specific limits.

Will either option affect my credit score?

Neither forbearance nor deferment directly affects your credit score since they are both considered to be good standing options. However, failing to manage your loans outside of these options could impact your credit.

How do I apply for forbearance or deferment?

You must contact your loan servicer to apply and provide any necessary documentation to support your eligibility, especially if you’re requesting deferment.

By carefully reviewing your qualifications and understanding each option’s implications, you can choose the right path for managing your student loans effectively during periods of financial hardship.