Picture this: It's college graduation day. You have your cap and gown, your diploma and congratulations from friends and family. You have hopes and plans for the future. And, if you're like 52 percent of full-time college students, you also have student loan debt. The average full-time student loan for the school year 2007-2008 was $7,100; by graduation, the total amount you owe could be in the tens of thousands [source: National Center for Educational Statistics].
You haven't even started your new job and you're already in debt. What do you do? Sinking into despair is not constructive; neither is defaulting on loans, which can result in poor credit ratings or garnishment of wages. Bankruptcy is not an effective strategy, either: Most likely the loan will not be discharged [source: Federal Student Aid: Loan].
You could start paying off your loans, but if that's not financially feasible, you may have two options. Depending upon the types of loans, amount you owe and immediate plans, you may receive a deferment or forbearance from your lender. Deferments allow you to postpone payment on your loan for several months or even years. With forbearance, you may postpone payments or lower your monthly payment by extending the length of your loan. You may seek deferment or forbearance anytime during the repayment period, but you may not be eligible if you are in default.
Several variables determine which type of debt relief you're permitted, beginning with the type of loan you received: federal or private (also known as alternative). Federal loans include the following:
- Perkins: Loans for undergraduate and graduate students exhibiting the greatest financial need. This is a subsidized loan: the government pays the interest while you're in school and for 9 months after graduation.
- Stafford: The most common undergraduate and graduate student loan. Subsidizing depends upon need.
- PLUS: Unsubsidized loans given to graduate students or parents of undergraduate students.
[source: Federal Student Aid: Loans]
Private (alternative) loans are through banks and other lending institutions and function much the same as other consumer loans: the terms vary, often significantly, from lender to lender. Read more about private and federal loans in How Student Loans Work.
Sorting through student loan repayment may seem complicated, but it's actually easier than that organic chemistry class you passed in your junior year. We'll examine qualifications for attaining deferments or forbearance, the processes for application and reimbursement, and the pros and cons of participation. First up: How do you know whether you're eligible for a deferment or forbearance?
Qualifications for Deferments and Forbearance
Are you eligible for a postponement of your loan repayment? Many factors are involved, so let's break this information down into small chunks. First, we're going to investigate deferments for federal loans, since regulations are consistent for all borrowers. Remember, parents -- not students -- take out PLUS Loans for undergraduates. Therefore, it's the parents' ability to repay that is considered [source: StaffordLoan.com]. In order to receive a deferment for any federal loan, you must prove your status in one of five areas:
- Student status: You are enrolled at least halftime.
- Continuing education: You are in a graduate fellowship or rehabilitation training program.
- Unemployed: You are actively hunting for full-time employment, even if it's outside your field.
- Economic hardship: You are in a difficult financial situation, such as serving in the Peace Corps, receiving public assistance or being a medical intern or resident. Many Web sites have calculators to help determine eligibility [source: FinAid: Hardship].
- Active Military Service: You are in service during wartime, a military operation or a national emergency.
[source: Federal Student Aid: Repaying]
Loans obtained before July 1, 1993 have additional deferment qualifications [source: Federal Student Aid: Deferment].
Next, let's delve into forbearance. Federal loan forbearance may be available if your lender determines you are not eligible for a deferment. This option may be less favorable, because regardless of your type of loan, you will be responsible for accrued interest [source: Federal Student Aid: Postponing]. Nevertheless, if you're finding it difficult to make payments, you may fit into one of the following eligibility categories:
- You suffer a temporary hardship, such as unemployment.
- Loan payments are more than 20 percent of your gross income.
- You are in an intern or residency program.
- You are a member of AmeriCorps, engaged in public service.
- You are participating in the Teacher Loan Forgiveness Program.
[source: Federal Student Aid: Forbearance]
There is some overlap between the categories for deferment and forbearance, so which you receive depends a great deal on your lender's view of your repayment abilities, the severity of your problem and your personal responsibilities (such as number of dependents).
If you have a private (alternative) loan, you might be able to get a deferment or forbearance similar to those offered for federal loans. Alternatives and requirements differ among lenders; check with yours to determine your chances.
By now you might have an idea of whether you want to request a deferment or forbearance. Let's take a look at the application process next, starting with federal and private deferments.
Logistics of Deferments
The first step: Fill out an application. You can find the official U. S. Department of Education forms online for both FFEL and Direct Loans [sources: USA Funds, Federal Student Aid: Deferment]. With any application, you're going to have to provide proof that supports your case, such as an official enrollment certification or documentation of public assistance. Each deferment type requires specific evidence that is delineated on the application.
There is no universal application form for requesting a Perkins loan deferment; you must contact your loan holder directly. If the holder is the Department of Education, you may use the sample request letter that appears on the department Web site [source: Federal Student Aid: Federal].
If you're still enrolled in school, you might be able to take advantage of a simpler method. Many colleges and financial institutions participate in the deferment component of the National Student Clearinghouse, a non-profit organization that verifies degree and enrollment information for more than 3,300 higher education institutions. If your lender participates, you only have to call the lender and request a deferment. The deferment is not inevitable, so remember to make any scheduled payments until you're sure it's been approved [source: National Student Clearinghouse].
How long will deferment last? That depends upon the reason for the postponement:
- Student status: The deferment is in effect while you are enrolled at least halftime.
- Continuing education: The deferment is in effect throughout your participation in the program.
- Unemployment: Each deferment lasts six months. You must apply for extensions, and there's a three-year limit.
- Economic hardship: Each deferment lasts one year with a three-year maximum.
- Active military service: There's a three-year maximum, but it may end sooner if your service ends.
[source: USA Funds]
If you have any past-due payments, the delinquent part of your loan -- the part that hasn't been paid -- may not be eligible for deferment; it depends upon your lender. You may be able to forbear the outstanding share [sources: Federal Student Aid: Deferment].
During the deferment, if you have an unsubsidized loan, you will be responsible for the interest that continues to accrue. Some borrowers choose to pay just this interest, because any left unpaid is added to your balance due (capitalized) after the deferment. The deferment itself should not negatively affect your credit score, because you are not refusing to pay, and you've gone through the appropriate channels.
When applying for a private loan deferment, the procedures, timelines and limits will depend upon your lender.
If deferment is not right for you, you might be entitled to forbearance. Let's explore that application process next.
Logistics of Forbearance
If you need to postpone payment of a loan but do not qualify for deferment, then forbearance might meet your needs. The procedure for obtaining federal loan forbearance is much like that for deferment. Step one: You must apply. Again, just like a deferment, nothing is automatic, not even a continuation of forbearance. Keep making those payments until you've received notification from your lender that the status has been approved.
If you have a Direct Loan, access an application online from the U. S. Department of Education [source: Federal Student Aid: Forbearance]; for FFEL or Perkins Loans, you'll have to contact your lender. Many of these forms may be available on lenders' Web sites.
How long will forbearance last? Like deferment, that depends upon the reason, and, if you need an extension, you must re-apply:
- Financial hardship (also called general forbearance): Lasts for one year; may reapply if needed.
- Loan burden: Lasts for one year; may reapply if needed, but forbearance cannot exceed three years.
- Internship/residency: Lasts for one year; may reapply if needed.
- AmeriCorps: Application is for term of service, not to exceed three years.
- Teacher Forgiveness Program: If you are a participant in this program, you can forbear your loan. You have a service commitment for five years, and you must apply for a forbearance each year.
[source: Federal Student Aid: Forbearance]
Unlike some deferments, you definitely will be responsible for interest that accrues during forbearance, and you might want to consider paying the interest instead of letting it accumulate. Any unpaid interest is added to the principal, increasing the total amount you will owe. In any case, your credit rating should not be negatively impacted, because it's just a postponement, not a default on payments [source: Federal Student Aid: Did You Know]. If you do stop paying your loan, however, your chance of acquiring forbearance plummets [source: Federal Student Aid: Default].
By now, you can probably anticipate the recommended procedure for obtaining forbearance on a private loan. All together now: It depends upon your lender.
The U. S. Department of Education provides information on alternatives to forbearance. For instance, there are other methods of reducing monthly payments, or you may adjust the date on which your payment is due. If it doesn't coincide with your other bills' due dates, repayment might be more manageable [source: Federal Student Aid: Did You Know].
You now have a tremendous amount of information: How do you determine what to do? To facilitate the decision-making process, let's look at the pros and cons of deferments and forbearance.
Pros and Cons of Deferments and Forbearance
There's a tremendous amount of information available concerning student loan repayment, but it still comes down to four choices: start paying now, don't pay at all, reduce monthly payments or postpone them. How do you choose which is right for you?
You need to contemplate your personal situation. There are several circumstances in which deferment or forbearance could benefit you.
Are you capable of making the loan repayments as scheduled? You could consolidate multiple loans, which might lower your payments enough to make them manageable. If career and lodging plans aren't shaping up, or you don't have an abundance of available funds as you transition from college to the world outside academia, then deferment or forbearance can ease a less-than-optimum process.
Also, if you are in a temporary setback -- whether form sudden health issues, a downturn in the economy, getting laid off or something else -- these kinds of things can negatively impact you in the short term. They may even arise long after graduation but within the loan repayment period. If you find yourself in this situation, getting a break on student loan payment might alleviate stress to some degree.
If you're considering loan default as an option, know that it could affect your credit rating, impact your salary (wage garnishment), encroach on your tax refund and result in penalties. Deferment or forbearance could prevent such things from happening.
On the other hand, there are disadvantages to deferments and forbearance; you have to weigh these consequences as well:
- How long will you need to postpone payment? Deferment or forbearance is usually for one year or less. You may be able to apply for extensions, but you usually won't be able to delay reimbursement for more than a few years.
- Are you willing to increase the total amount you owe? In the case of deferment of unsubsidized loans and for all forbearance, any unpaid accrued interest is added to the capital.
- Do you want to pay up front for the service? Private loans may have a fee for deferment or forbearance.
Deciding the best way to pay off your student loans is not easy, but you have facts to aid you in making an informed decision. Still looking for more input? Read on for links to lots more information about deferment, forbearance and student loans.
Related HowStuffWorks Articles
More Great Links
- College Scholarships.org. "Life after College: Your Forbearance Options." 2009-2010. (March 4, 2010) http://www.collegescholarships.org/loans/forbearance.htm
- Duncan, Arne. "Move our Money from Banks to Students." February 22, 2010. (March 3, 2010) http://www.huffingtonpost.com/arne-duncan/move-our-money-from-banks_b_471038.html
- Federal Student Aid. "Deferment Forms." (March 3, 2010) https://www.dl.ed.gov/borrower/DefermentFormList.do?cmd=initializeContext
- Federal Student Aid. "Did You Know…" (March 5, 2010) https://www.dlssonline.com/borrower/ForbearanceCounseling.do
- Federal Student Aid. "Facing Loan Default." (March 6, 2010) http://www2.ed.gov/offices/OSFAP/DCS/default.html
- Federal Student Aid. "Federal Perkins, Defense and National Direct Student Loan (NDSL) Deferment and Cancellation." (March 5, 2010) http://ed.gov/offices/OSFAP/DCS/perkins.deferment.cancellation.html#SampleDeferment
- Federal Student Aid. "Forbearance Forms." (March 4, 2010) https://www.dl.ed.gov/borrower/ForebearanceFormList.do?cmd=initializeContext
- Federal Student Aid. "Loan Cancellation and Discharge." (March 3, 2010) http://www2.ed.gov/offices/OSFAP/DCS/loan.cancellation.discharge.html#Bankruptcy
- Federal Student Aid. "Loan Consolidation." July 14, 2009. (March 10, 2010.) http://studentaid.ed.gov/PORTALSWebApp/students/english/consolidation.jsp?tab=repaying
- Federal Student Aid. "Loans." 2009-2010. (March 4, 2010) http://studentaid.ed.gov/students/publications/student_guide/2009-2010/english/typesofFSA_loans.htm
- Federal Student Aid. "National Student Loan Data System." (March 5, 2010) http://www.nslds.ed.gov/nslds_SA/
- Federal Student Aid. "Postponing Repayment." January 7, 2010. (March 4, 2010) http://studentaid.ed.gov/PORTALSWebApp/students/english/difficulty.jsp
- Federal Student Aid. "Public Service Loan Forgiveness (PSLF)." February 16, 2010. (March 8, 2010)http://studentaid.ed.gov/PORTALSWebApp/students/english/PSF.jsp
- Federal Student Aid. "Repaying your Student Loan." 2009-2010. (March 4, 2010) http://studentaid.ed.gov/students/publications/student_guide/2009-2010/english/postponeloanpayment.htm
- Federal Student Aid. "Repayment Information." January 6, 2010. (March 4, 2010) http://studentaid.ed.gov/PORTALSWebApp/students/english/repaying.jsp?tab=repaying
- Federal Student Aid. "Stafford Loan Forgiveness Program for Teachers." February 20, 2009. (March 4, 2010) http://studentaid.ed.gov/PORTALSWebApp/students/english/cancelstaff.jsp
- FinAid. "Direct Loans vs. the FFEL Program." 2010. (March 4, 2010) http://www.finaid.org/loans/dl-vs-ffel.phtml
- FinAid. "Economic Hardship Deferment Calculator." 2010. (March 3, 2010) http://www.finaid.org/calculators/economichardship.phtml
- FinAid. "Private Student Loan Consolidation." 2010. (March 10, 2010). http://www.finaid.org/loans/privateconsolidation.phtml
- National Center for Educational Statistics. "Fast Facts." 2009. (March 3, 2010) http://nces.ed.gov/fastfacts/display.asp?id=31
- National Student Clearinghouse. "Simplifying Loan Deferments for Students." 2010. (March 5, 2010) http://www.studentclearinghouse.org/students/deferment_process.htm
- StaffordLoan.com. "Federal Loan Deferment Options." 2010. (March 4, 2010) http://www.staffordloan.com/repayment/deferment.php
- Student Loan Network. "Federal Perkins Loan Program." 2010. (March 5, 2010) http://www.studentloannetwork.com/federal-student-loans/perkins.php
- Student Loan Network. "Federal Student Loan Deferment." 2010. (March 4, 2010) http://www.studentloannetwork.com/federal-student-loans/deferment.php
- USA Funds. "Deferment and Forbearance Forms." 2010. (March 4, 2010) http://www.usafunds.org/lenders/forms/deferment_forbearance.htm