What's the Difference Between Deferment and Forbearance and Which One Should I Choose?

In 2011, our nation’s outstanding student loan debt reached one trillion dollars. And today, many are finding it difficult to make their minimum payment due to job loss, health issues, unemployment, or because they are not making enough money to cover their bills. As a result, many are exploring options to skip their student loan payment altogether for a limited period of time. There are two ways to do this, known as deferment and forbearance, and both depend on your situation and the kind of student loan you have.

If you have a federal, subsidized loan, always go for a deferment first. There are different deferments and each has different criteria, such as military active duty, school enrollment, or unemployment. Most deferments are offered for a limited amount of time over the life of your loan. During a deferment, the federal government pays any interest that accrues on your subsidized loans – but not on unsubsidized loans.

If you don’t meet deferment criteria, you may qualify for a forbearance, which is granted by your lender for a limited period of time. There are a variety of reasons one might be granted a forbearance, among them unemployment, poor health, less than half-time school enrollment, a reduction in work hours, and more. Unlike a deferment, in forbearance both subsidized and unsubsidized portions of your loan continue to accrue interest. At the end of a forbearance, the interest is capitalized, meaning it is added to the principal balance of the loan. Forbearance can increase the amount you owe if you choose not to pay the interest that is accruing.

Remember that, despite temporary reprieve, both deferment and forbearance extend the amount of time you owe on your loans, causing you to pay more in interest and save less. The average person carrying student debt has a balance of $25,000. What’s more, about 40 percent of student loans are owed by people between the ages of 30 and 49.* If that 49-year-old paid off his loans by age 30 instead of 49 and saved the monthly payment of $250/month, he would have $135,365 at age 49.** ¬†That’s a lot of money in his pocket just for paying his loans off early and saving the payment!

*Federal Reserve Bank of NY, Grading Student Loans

**Using 8% rate of return