Deferment and Forbearance
 

Both a deferment and forbearance are ways of temporarily suspending your student loan payments during times of financial difficulties. 

However, there are differences between a deferment and a forbearance that you should understand prior to receiving one of the other from your student loan lender.

Deferment

A deferment will postpone all student loan payments and under certain conditions will also prevent interest from accruing on your loan while in the deferment period.  

This is extremely important as it allows the borrower to pause their loan while the balance does NOT continue to grow. The US Government would pay the interest on your loan during the deferment period if you have:

  • Federal Perkins Loans
  • Direct Subsidized Loans
  • Subsidized Federal Stafford Loans

Any other loan types you would be responsible for paying back interest that accrues during a deferment period, including all unsubsidized federal student loans.

You would not be responsible for paying the interest while you are in the deferment, but the interest will capitalize and be added onto your principal balance that would need to be paid back once your deferment period is finished.

Eligibility for a deferment would be determined based on what type of loans you have, and the reason for the request of a deferment. For example, if you are having an economic hardship you may be eligible for up to 36 months of deferment on your student loans. 

If you are enrolled in college at least half time or more, you could also be eligible for deferment while enrolled.

If you would like to check your eligibility for a deferment, you will want to contact your current lender and explain to them why you need the deferment. 

They should then grant it to you based on eligibility.

Delinquency and Deferment

If you fall into delinquency, it is best to amend the crisis as soon as you can. Although it can harm your credit score to pay off too quickly, seeking a new job or a second source of income in order to catch up on your payments will cause even more severe damage on your credit rating. Once you resolve a delinquency by establishing an Income Based Repayment, Income Contingent Repayment, or another similar repayment option, your credit rating will quickly restore itself to the level it was at before you became delinquent, resolving the issue. 

If you took out a student loan with a private lender, you’ll find that you have fewer repayment options than with a federal student loan.  Even so, most banks will work with you to help not just you and your credit score, but to ensure that “bad” loans are not associated with them. The best option is to notify your lender before you miss a payment and set up a new repayment plan as soon as you can to avoid delinquency. 

If you have already fallen into delinquency, you still have options, but you will need to establish a new repayment plan quickly and follow up with the lender and the credit reporting agencies to make sure any bad information about it has been updated. Once it is clear that you have gotten a new repayment plan, your credit score will look much better. 

A student loan in deferment or forbearance will, fortunately, not cause any damage at all to your credit score. Payments are not required when a loan is deferred, so there is no way that you can be “late” in making them. If you have experienced a financial crisis due to unemployment or an extended illness or injury, consider deferment as an option to avoid getting a bad credit rating.

Alternative to Deferment for Economic Hardships

Although a deferment can be a very useful option for borrowers with an economic hardship, it can also be very beneficial for a borrower to apply for a direct loan consolidation and an income based repayment plan (IBR).

This consolidation program is a federal program that allows the borrower to combine all their student loans into one new loan, and into a payment plan that is affordable for the borrower.

Forbearance

A forbearance is similar to the deferment in that it pauses your student loan payments for a certain amount of time. One large difference is that the US Government does not pay for interest during the forbearance period, so all interest will capitalize and be added onto the balance of your loan during the forbearance period. There are two types of forbearance that federal servicers provide. 

Mandatory Forbearance Federal servicers are required by law to provide a forbearance under certain circumstances: 

  • You are a member of the national guard but are not eligible for a military deferment
  • You are currently teaching at a qualify school and want to apply for teacher loan forgiveness
  • If your monthly student loan payment exceeds 20% of your total monthly gross income
  • You are in a medical or dental residency program
  • You qualify for a partial repayment under the US Department of Defense Repayment Program

Discretionary Forbearance 

If you do not qualify for the above mandatory forbearance, the lender may grant you a forbearance based on their discretion. You would need to contact your lender to explain why you feel that forbearance is really needed on your student loan. They are most likely to work with you and offer forbearance if a financial hardship exists or a serious illness that prevents you from working.

If you would like to check your eligibility for a forbearance, you will want to contact your loan servicer and explain to them why you need the forbearance.

What are defaulted Student Loans?
1

Defaulting on a student loan is when you stop making your loan payments. Sure, there are times late payments are made, but not making any payments places you in default status. Unfortunately, there are serious consequences when defaulting on a student loan.

The school you attended guaranteed the loan. Whether you have a private loan or a federal loan, the lenders will take action against you to recover the money you owe. Defaulting on student loans is a nightmare; it affects your credit, your wages can be garnished, and your bank accounts levied. 

When you are placed in default for a Federal Direct Loan or Federal Family Education Loan, those programs are owned by the US Department of Education. They have a resolution group dedicated to recovering defaulted funds.

If you know that you’re in default, there are a few things you should immediately look into:

  • Find out if you have private loans or federal loans
  • Contact your lender and explain why you defaulted
  • Ask how you can resolve this issue
  • Make sure that if you set up a new payment plan that you can stick to it.

Defaulting on student loans, though serious, doesn’t mean you can’t move forward. There are options available to you. Look into:

  • Loan repayment
  • Loan consolidation
  • Loan rehabilitation
How do I know if I’ve defaulted on my Student Loans?
 

Every institution is different. However, you are considered to be in default if you haven’t made payments in 3-6 months. You should receive a series of notices via phone, post, and, or email from your lender like:

  • Your student loan payment is late
  • If you don’t make your payment within “X” time-frame, this month’s payment will cost “X” amount in late fees on top of your payment
  • You are two months behind on your loan payment
  • If we do not hear from you and no payment is made, you are at risk for DEFAULTING ON YOUR STUDENT LOANS by “X” date.
  • You have DEFAULTED ON YOUR STUDENT LOANS; this will appear on your credit and we will do “X” to ensure we recover our monies

A great way to avoid this issue is to contact your student loan provider and let them know your situation and find out how they can work with you so you avoid being in default.

  • If you can’t make payments because you’re leaving for active duty in the military, going back to school, or your financial situation has changed, request a loan deferment or forbearance.
  • If you are headed to graduate school, contact your loan provider and let them know. Find out if you’re eligible for a grace period.

Consequences of defaulted loans:

  • Collections, plus interest
  • Garnished wages
  • Taken to court
  • Ineligibility for additional Federal, and, or private student loans
  • You can be reported to the credit bureau which affects your credit

Bankruptcy doesn’t always include student loan debt. We can’t stress this enough, contact your loan provider if you anticipate issues paying your loans.

What is Student Loan Rehabilitation?
 

When you’ve defaulted on your federal student loans, there is a one-time opportunity to qualify for loan rehabilitation. Unfortunately, there isn’t a second chance with this, so if you default on your loan again, you’re ineligible for rehabilitation of your student loan.

Rehabilitation Student Loans and Default Removal

You, the individual, are the borrower, the person who took out the federal student loan and, or private student loan. When you’ve defaulted on your loan, but made an upwards of 10 monthly payments, you’re eligible for a student loan rehabilitation program. 

Very important: Your payments must be made on time. How is that defined? 

  • Within roughly two-weeks of the payment due date.

The rehabilitation Federal Family Education Loan Program (FEEL) needs your loan to be sold to a lender after you, the borrower, complete all tasks required for student loan rehabilitation. Typically, it takes between 30-90 days for the default to be removed from you, the borrower’s credit report.

Realistic Payments and What That Mean for you

If you, the borrower are in financial duress or you’re on welfare, receiving social security, Veteran’s benefits, or workmen’s comp, you’ll need to prove your income and expenses. Upon completion, your monthly payment will be based on what you can realistically afford. The amount differs for everyone. If you’ve never seen an income and expenses report for this particular program, please review this:

Good Faith Payments
Good faith payments are separate from regular payments and wage garnishment payments. If the lender or agency is overseeing your account, speak with them about making good faith payments and how that will impact your ability to qualify for student loan rehab and out of default.

Student Doc And Prep is not affiliated with the United States Department of Education or any U.S. government offices or branches. Student Doc And Prep has no influence in any decisions made by the Department of Education. Student Doc And Prep is strictly a document preparation service.

© 2016 STUDENT DOC AND PREP. ALL RIGHTS RESERVED
Powered By ClickFunnels.com