For higher education to be made more affordable, many students seek some form of financial assistance or supplement to cover their tuition and other expenses. It might be scholarships, some may work, others may seek educational grants or gifts from family and friends. Still, some students, and parents, turn to educational loans. An educational loan is not the best option for funding your education, but it is an available option and some students may look at it as a means to an end, to obtain a degree and ultimately a good paying job.
All too often, students take out loans to get through their higher education. I too was one of those students. Once graduated and working, some may not expect those payments to hit so fast and hard. Borrowers often end up in a place where they have become overwhelmed in the debt they have incurred while achieving their education. I would like to say that most borrowers would love to be in a place to pay back the full amount of their loans, but when life hits after graduation, it may not be possible to jump in right away and start tackling that debt that you incurred. Or it may be that you were able to handle the debt, but over time life’s circumstances began taking away what you can put aside to pay down the student loan debt. For those federal student loan borrowers who are facing financial challenges preventing you from staying up to date on your loan payment, there are repayment solutions for postponing or delaying payments for a temporary time.
Deferments and forbearances were made available to federal student loan borrowers for flexibility in repayment options. They allow you the time to strengthen your finances, bring your loan current and be in a position to keep up with your monthly payments. These two methods used to delay payments, will have different eligibility rules and time frames. If you have a non-federal school loan or private loan, contact your loan servicer or lending company about available options for delaying payments, should you need it. They may also offer deferments and/or forbearances, however the terms and conditions for eligibility, duration and benefits may differ. Repayment options can vary by servicer or lender and may not be as flexible as they are for federal student loans. Below, I have compiled a list of similarities and differences between deferments and forbearances.
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Deferment
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Forbearance
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*capitalize: Added to the total loan balance. This will increase the total owed on the loan. Federal Perkins loans are exempt from capitalized interest.
Now, I do not personally agree that delaying payments is the best option for controlling your school loan debt. Nevertheless, there are many who are in a bind and found suspending payments for just a little while may have helped them get back on their feet. A large number of Americans, either currently attending an institution of higher education or have attended in the past, have taken out loans at one time or another to help fund their education. As a matter of fact, 43% of Americans who attended college have some amount of educational debt, according to the Federal Reserve Board’s 2019 Survey of Household Economics and Decisionmaking. Of those borrowers, 95% have school loan debt, while others who have debt may have used credit cards, mortgaged their home or found some other means to borrow the money to fund their education.
So, to start tackling the mounds of educational debt that you incurred in order to complete your education and get the job you have always wanted, you can choose to apply for a forbearance or deferment. But, consider there are also several other options available for managing your debt. You can seek out repayment plans such as an income-driven repayment plan which would lower your payments. Visit the Federal Student Aid website for a listing of repayment plans specifically for Direct and FFEL Program Loans. You may also want to consider loan consolidation or working towards loan forgiveness. All of these options, of course, are assuming you do not have the means to pay off our loans outright. For non-federal loans, contact your loan servicer for other available options. I would always encourage to seek out reducing your monthly payments through a repayment plan prior to settling on a deferment or forbearance. Here are some reasons why:
1. Delaying payments is only a temporary solution. When you halt your payments, even if it is for a few months, you are essentially prolonging the time you will have to pay back your loans. The payment amounts that you defer do not disappear, vanish into thin air or just go away because they have been suspended. No, those payments are tacked right on to the end of your loan along with unpaid accrued interest. Just waiting for your return. So, understand that delaying your payments for a few months can add months or even additional years to your original loan in the end.
2. You WILL pay more money to suspend your payments then you owed prior to the deferment. Why is that? When you postpone making payments the interest continues to accrue. The interest charges are not delayed like the payments are. Interest continues to accrue during suspension and is capitalized at the end of the deferral period. There are only a couple of circumstances in which interest is not capitalized. If you have subsidized federal student loans such as subsidized Stafford or subsidized consolidation loans or if you have a Federal Perkins loan, your interest will not capitalize. All other loan types, along with private loans do not offer this flexibility. The only other way to get around the incessantly accruing interest is to make payments on the interest while you are in deferment or forbearance.
All in all, when you find yourself in a bind and having a hard time keeping up with your educational loans, the best thing to do, first and foremost, is to contact your lender or servicer and let them know of your situation. They will discuss your options and the best alternatives for your specific situation. Never choose an option because someone you know has chosen a specific repayment method for themselves. Your situation is unique, and you have to make the right and the best choices for the position you are in.
NOTE: This discussion does not apply to the COVID-19 period. Federal student loans were automatically placed in a special forbearance called an administrative forbearance which was created specifically and only for COVID-19 during the months of March through September 2020. Some private lenders are offering assistance for COVID-19 as well. It is best to contact those loan servicers to learn more about their COVID-19 support.
Always plan deliberately, plan wisely and plan Centsably when you borrow!
Information for this article was gathered from experience and the following websites: Federal Reserve, Federal Student Aid, Great Lakes, Nelnet, Sallie Mae, Fedloan and Investopedia, Forbes.
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