The average graduate from the Class of 2016 carries over $37,000 in student loan debt. This can create a huge financial struggle for anybody looking to start their career and pay for other expenses along the way.
To avoid falling behind, borrowers can take advantage of two temporary debt relief options to halt their student loan payments: deferment and forbearance.
Deferment or forbearance?
Although both options may seem like lifelines for getting out of paying your student loans, deferment and forbearance each have their trade-offs as debt solutions. Both can buy you some time in paying off your loans, but they may not save you money.
A student loan deferment is when your loans are deferred, or put off, for up to three years. Borrowers approved for deferment on their federal loans won’t be obligated to make their payments for a temporary period of time.
For some loans, like Perkins Loans, Direct Subsidized or Direct Stafford Loans, the U.S. government may even pay your interest while your principal payments are delayed.
Forbearance, on the other hand, is similar to deferment. It’s a pause or reduction in your payments up to one year. With forbearance, interest will continue to accrue even though you won’t owe any money during this time.
Postponement can come with pitfalls, and it might even create more financial problems on top of your existing debt. Examine some of your alternatives and see if now is the right time for a deferment or forbearance of your student loans.
Here are six things to keep in mind when you consider deferment or forbearance:
1. Deferments and forbearances are only temporary
Depending on your circumstances, most deferment increments last for up to three years. And that’s with most extensions exhausted.
Forbearances are also generally granted at the discretion of your lender for up to one year. Be sure to consider whether that will that be enough time to get your financial affairs in order to start repaying your debt.
Once you’ve used up your deferments or forbearances, you won’t be granted any more — even if you encounter more severe financial troubles in the future.
2. Use caution with discretionary forbearances
Eligibility requirements for deferment can be strict. Federal lenders want to ensure that borrowers meet certain criteria before granting a stay of loan payments.
But forbearances are often discretionary, and granted to borrowers who can prove financial hardship. Private lenders may apply their own standards to forbearances, and may even allow you to decide when you’d like to elect forbearance.
If you’re approved for an elective forbearance, it’s up to you to enter and exit forbearance at your own volition. Some borrowers will opt back in and then opt back out a few months at a time.
If you can’t make payments at the moment, forbearance gives you some financial breathing room to find a way to make your loan payments.
It’s always better to take some time to get your finances together in order to afford student loan payments, rather than avoid just paying them altogether.
3. You’ll still owe interest on some loans
Deferment and forbearance may alleviate your principal owed on most loans, but interest will still accrue — or capitalize — in many cases. If you have an unsubsidized or PLUS loan, the government won’t pay your interest at all during deferment.
With all forbearances, interest will continue to accumulate on every loan you’ve borrowed, whether it’s subsidized, unsubsidized, or anything in between. This means that by the end of deferment or forbearance, your total loan balance will be more than when you started.
Before considering deferment or forbearance, consider whether you can resume paying your loans with extra accrued interest once your deferment or forbearance period is up or not.
4. Deferment or forbearance isn’t always free of charge
For private student loans, deferment or forbearance may come with fees that can increase your total loan balance. And that’s in addition to interest that may build on certain loans.
Borrowers should remember that these fees are usually charged beforehand. These fees can further exacerbate your financial troubles that led you to pursue a deferment or forbearance in the first place.
5. Consider loan consolidation or refinancing
Look at deferment and forbearance as last-ditch measures to take only if you’re on the brink of bankruptcy, default, or delinquency.
Until that happens, examine other alternatives, like consolidating your loans into one new loan with a lower interest rate. Or, try refinancing your loans to a lower APR.
Approaching your lenders to create a new repayment plan — or applying for a federal income-based payment alternative — are other options to consider if you want to decrease your monthly payments without having to suspend them outright.
6. Review your financial situation carefully
Be honest with yourself and assess how difficult your financial hardship really is.
For instance, qualifying for an unemployment deferment doesn’t mean you need to be completely out of work. You may still be eligible even if you’re working up to 30 hours a week.
If you’re part-time or semi-employed, you can look for an additional source of income — like a second job — to make your student loan payments.
You can also try refining your budget and reduce any unnecessary expenses that may free up some extra cash to put towards your debt. Eliminating cable subscriptions, eating out less, or cutting out your daily Starbucks order are good places to start.
Look at every money-saving option available before going down the road of deferment or forbearance.
Strategic Deferment or Forbearance
If all avenues have been explored and deferring or forbearing your student loans is the best option for you, plan it out strategically. Choose deferment rather than forbearance if your loan qualifies to have its interest paid in full.
Deferment or forbearance may also be a practical option if you’re unable to meet your repayment obligations due to military service, Peace Corp volunteer work, or parental/family leave. In the case of financial hardship, you may have more flexibility than you think.
By budgeting carefully, minimizing expenses, and living within your means, you’ll be able to maximize your financial situation and poise yourself to pay down your debt, even with a deferment or forbearance period.
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