Making payments on a federal student loan in the time of coronavirus may be impossible for millions of borrowers who suddenly find themselves without a job. But even in good times, events may conspire to make repayment difficult.
Thankfully, federal student loans have several mechanisms to offer you relief when you need it. The two temporary measures we’ll explore in this article are deferment and forbearance. Let’s begin with some basic definitions to bring you up to speed, then we’ll tackle the types of relief and actions you can take to keep your finances in good standing
What is Student Loan Deferment?
A federal student loan deferment is a temporary delay in the repayment of loan principal and interest, usually because of an inability to repay due to economic hardship.
During deferment, the government may pay the interest on direct subsidized loans and Perkins loans, but not on unsubsidized and PLUS loans, where the interest accrues. Accrued interest is added to the principal amount of your loan once the deferment period ends.
What is Student Loan Forbearance?
Student loan forbearance suspends or lowers your federal student loan payments temporarily during times of financial stress. Student loan forbearance typically lasts for 12 months or less, making it a short-term solution.
During forbearance, interest accrues during periods of forbearance, although you can choose to make the interest payments during the period in order to avoid accrual.
There are two types of forbearance, discretionary and mandatory, which are based on your current financial status and are generally determined by your loan servicer. See the How to Apply for Student Loan Forbearance section below for more info.
Deferment vs. Forbearance
Federal student loans can be temporarily suspended for short periods through deferment and/or forbearance, features seldom found in private student loans.
These two options differ in some respects, but share a few features:
- Typically, interest accrues during deferment or forbearance periods. Your loan balance will increase during these periods and add to the total amount you’ll have to repay. You can maintain your balance by paying just the interest during deferment or forbearance periods.
- Forbearance and deferment are temporary, as opposed to permanent loan forgiveness, which cancels your remaining balance if you participate in qualifying activities for a set period. However, you will not make progress toward forgiveness during periods of forbearance and deferment.
- For the 60-day period that began on March 13, 2020, all federal student loan borrowers can pause their repayments and incur no interest charges. You’ll have to contact your loan servicer to take advantage of this option. You will not have to provide any documentation to qualify. It’s possible this pause will be extended if the coronavirus pandemic continues beyond the original 60 days.
The most distinctive difference between either option
is that forbearance always increases the amount you owe; on the other hand, deferment can be interest-free for certain types of federal loans. Simply put, forbearance is not as desirable as deferment, in which you may not have to pay interest that accrues during the deferment period on certain types of loans. With forbearance you are always responsible for accrued interest when the forbearance period is over.
So which program should you choose?
- Deferment is the better choice if you have subsidized federal student loans or Perkins loans.
- Deferment is also a good financial decision if you are unemployed or dealing with significant financial hardship that will affect you short-term situation.
- Forbearance is generally a better decision if your financial challenge is temporary (less than a year, such as caregiving for a dependent, changing occupations, etc.) .
- Forbearance also may be your only option if you don’t qualify for deferment (or other state and federal programs – see Alternatives to Student Loan Deferment and Forbearance below)
That being said, neither option is a good long-term solution. If you don’t expect your financial situation to improve within one year, understand that you have other options.
How to Apply for Student Loan Deferment
You can apply for an economic hardship deferment by completing the Economic Hardship Deferment Request. You may qualify for an economic hardship deferment if:
- You engage in full-time work but earn less than 150% of your local poverty guideline; or
- You are receiving welfare or other means-tested benefit; or
- You are in the Peace Corps.
- Alternatively, you can apply for a deferment if you are unemployed and cannot find a job. You can apply by completing an Unemployment Deferment Request.
An economic hardship or unemployment deferment cannot extend beyond three years.
You may qualify for a deferment due to non-economic reasons. You can use the following links to apply for one of these deferments:
- Graduate fellowship deferment
- In-school deferment
- Military service deferment
- Rehabilitation training deferment
- Parent PLUS borrower deferment
You can receive a mandatory deferment if your student loan debt burden results in a monthly payment that is at least 20% of your total monthly gross income.
Under mandatory deferment, your loan servicer must approve your deferment request if you meet the eligibility requirements. Generally, mandatory deferment applies to Direct Loans and FFEL Program loans.
This deferment can run for up to three years. You can apply by completing the Mandatory Forbearance Request: Student Loan Debt Burden.
How to Apply for Student Loan Forbearance
As mentioned previously, there are two types of forbearance: discretionary forbearance and mandatory forbearance.
The decision to grant discretionary forbearance rests with your loan servicer. It is usually requested because of financial hardship, medical expenses, employment changes, or some other acceptable reason. This type of forbearance is available for Direct Loans, Federal Family Education (FFEL) Program loans, and Perkins Loans.
If you still need forbearance after 12 months, you can apply for another 12-month period. The cumulative limit on discretionary forbearance is 36 months. You can apply for discretionary forbearance by completing the General Forbearance Request.
Alternatively, you may qualify for mandatory forbearance (up to 12 months at a time) if you meet the eligibility requirements for any of following:
- AmeriCorps service
- Medical or dental internship or residency
- Department of Defense student loan repayment program
- National Guard duty
- Teacher loan forgiveness
Alternatives to Student Loan Deferment and Forbearance
If you’re debating the merits of student loan deferment versus forbearance, you should know that these are not the only options available to you. In fact, you can actually be eligible for a number of programs that lower monthly payments, reduce overall student loan balances, or eliminate them altogether.
Here are some of the most common advantages:
- You may receive the same immediate relief as student loan deferments with added additional long-term benefits.
- Monthly payments are generally lower, and may potentially lower your monthly payments to $0 because you don’t earn much income (which is equivalent to pausing payments).
- Income-driven plans typically waive interest costs if your monthly student-loan payments don’t cover accrued interest. This mirrors deferment benefits for three years, the same timeframe if you choose to defer your student loans due to unemployment and economic hardship.
- Loan forgiveness is possible, meaning that you could reduce monthly benefits after 20 – 25 years of regular payments. This can be a significant benefit for large student loan balances.
Federal Student Loan Forgiveness Programs
Available only to borrowers with federal student loans, there are a few options that offer income-driven repayment plans that are open to most borrowers that meet certain requirements.
|Income-Driven Repayment Forgiveness||The federal government offers four main income-driven repayment plans:|
Revised Pay As You Earn Repayment Plan (REPAYE Plan)Pay As You Earn Repayment Plan (PAYE Plan)Income-Based Repayment Plan (IBR Plan)Income-Contingent Repayment Plan (ICR Plan)
These plans enable borrowers you to cap student loan payments at a percentage of their monthly income. Depending on which plan you apply for, your remaining student loan balance will be eligible for forgiveness after 20 or 25 years.
|Public Service Loan Forgiveness||Public Service Loan Forgiveness is available to government and eligible nonprofit employees with federal student loan debt. Borrowers can have their remaining loan balance forgiven tax-free after making 120 qualifying loan payments (10 years).|
|Student Loan Forgiveness for Nurses||Nurses with student debt have several options for student loan forgiveness: |
Public Service Loan Forgiveness (see above)Perkins Loan CancellationNURSE Corps Loan Repayment Program, which can potentially pay up to 85% of qualified nurses’ unpaid education debt.
|Teacher Loan Forgiveness||After working five consecutive years, teachers employed full time in low-income public elementary or secondary schools can be eligible for Teacher Loan Forgiveness after working for five consecutive years. Eligible teacher can expect to have up to $17,500 in federal direct or Stafford loans forgiven. Note: Qualifying teachers must have taken out loans after Oct. 1, 1998.|
State-Sponsored Repayment Assistance Programs
If you don’t meet the previous federal programs, there are many other student loan forgiveness or payment assistance programs you may qualify for through state programs that are geared towards your profession and where you work.
|STEM Profession Student Loan Forgiveness||STEM (Science, Technology, Engineering, Mathematics) students and professionals are given student loan forgiveness incentives for living and/or working in various states.||The Harold Alfond Foundation, through the Alfond Leaders program, pays off student loans for Maine students.|
|Profession-based Student Loan Repayment Assistance Programs (LRAPs)||States offer teachers, lawyers, nurses, doctors and other needed professionals in certain states are given student loan forgiveness incentives for living and/or working in various states. The federal government also provides assistance ||The Mississippi Teacher Loan Repayment Program pays up to $3,000 annually for a maximum of four years on undergraduate educational loans to full-time teachers with a specific teaching licenses and qualifications.|
|Military Student Loan Forgiveness and Assistance||Military personnel in the Armed Forces may qualify for their own loan forgiveness programs depending on which branch they work for, rank, and other factors ||The National Guard offers qualifying soldiers and officers up to $50,000 towards federal student loans through the Student Loan Repayment Program.|
Student Loan Discharge/Cancellation Programs
|Perkins Loan Cancellation||Borrowers with federal Perkins loans can have up to 100% of those loans canceled if they work in a public service job for five years, with a percentage of student loan debt discharged incrementally for every year worked.|
|Closed School Discharge||You may qualify for loan discharge if your school closes. However, eligible students must have been enrolled or have left within 120 days without receiving a degree.|
|Borrower Defense to Repayment Discharge||If a borrower was defrauded by their colleges, you may be eligible for debt relief by filing a borrower defense to repayment claim with the U.S. Department of Education.|
|Total and Permanent Disability Discharge||If you are unable to work due to being totally and permanently disabled, you may eligible to have your remaining student loan debt canceled. To be eligible, you’ll need to provide documentation proving your disability.|
|Total and Permanent Disability Discharge for Veterans||Veterans who are totally and permanently disabled will have their student loan debt discharged automatically unless a veteran chooses to decline due to potential state tax liability. It should be noted that federal taxes do not apply for veteran loan forgiveness.|
Potential Drawbacks of Loan Forgiveness, Cancellation and Discharge Programs
As you can see, there are plenty of benefits for enrolling in the aforementioned loan forgiveness and cancellation programs offered by the federal government and states. While legitimate forgiveness, cancellation and discharge programs are free through the Department of Education, there are a few costs to consider when making your decision:
- Forgiven student loans may be taxable. Generally speaking, forgiven, canceled or discharged student debt is taxed as income unless borrowers were required to work for a certain type of employer or profession to qualify for the forgiveness.
- For example, student loan debt forgiven through income-driven repayment plans is taxable; student loans discharged through Public Service Loan Forgiveness are not taxable.
- Defaulted loans do not enable borrowers to be eligible for loan forgiveness. To qualify in this situation, borrowers will need to use consolidation or rehabilitation to get defaulted federal student loans in good standing before becoming eligible for forgiveness programs. If your student loans are not qualified for forgiveness programs, student loan settlement or bankruptcy may reduce the debt in severe cases. Also, it should be noted that defaulted federal loans are eligible for discharge programs
- Because income-driven repayment plans extend your repayment terms, you may end up paying off more interest overall during the new term of the loans (ex. REPAYE extends terms to 20 – 25 years, which may be longer than making regular monthly payments.)
In a perfect world, student loans would not be and obstacle for many borrowers who sought higher education.