Options for managing your student debt burden: student loan deferment and forbearance

Part 4 of Highway’s “Options for managing your student debt” series. The federal student loan pause is officially over and borrowers may be wondering what they can do to manage their student debt. Let’s dive into a “last resort” option for borrowers: student loan deferment and forbearance.
The Highway Team
The Highway Team
Updated
Published
November 7, 2023

Post Summary

The payment pause that most federal student loan borrowers were able to take advantage of during the pandemic, was a unique type of one-time forbearance. Let’s take a look at what the everyday student loan deferment and loan forbearance programs look like in part 4 of “Options for managing your student debt”     

Other posts in this series: 

What are student loan deferment and student loan forbearance?

Student loan deferment and student loan forbearance are two types of temporary relief programs available for some borrowers that are having difficulty making their minimum monthly payments. Generally, deferment and forbearance refer to federal loan programs but similar types of programs may be available for private loans, depending on the servicer.

With both deferment and forbearance, borrowers are allowed to temporarily stop making payments on their loans. How long payments are suspended for and how interest is handled during the suspension period will depend on the type of forbearance or deferment program a borrower qualifies for. In most cases, student loan holders will need to apply for deferment or forbearance programs with their loan servicer. 

What is the difference between federal student loan deferment and student loan forbearance? 

The difference between the two programs has to do with how interest accumulates during the temporary relief period and is capitalized (or not capitalized) at the end of the relief period. 

When it comes to the official federal deferment and forbearance programs, the difference between the two programs has to do with how interest accumulates during the temporary relief period and is capitalized (or not capitalized) at the end of the relief period. 

When federal loans are deferred, interest may not accrue on all types of loans, however any interest that does accrue will be capitalized (added to) your loan principal if it is not paid off at the end of the deferment period. 

When federal loans are put in forbearance, interest will accrue on all types of loans. In most cases, this interest is non-capitalizing, meaning it will not be added to your loan balance at the end of the forbearance period. However, you will be responsible for paying off the accrued interest. 

Only Federal Family Education Loans (FFEL) that are not serviced by the department of education will accrue capitalized interest during forbearance.  

Here are the loans that will typically accrue interest during deferment: 

Who can apply for federal deferment and/or forbearance?  

There are three broad types of loans that qualify for federal deferment and forbearance: Direct loans, FFEL Program loans, and Perkins Loans. Any federal borrowers with these loans, who also meet certain eligibility requirements, can apply for forbearance or deferment programs.

What are the types of federal deferment programs? 

Borrowers with Direct loans, FFEL Program loans, and Perkins loans might qualify for deferment in the following circumstances:

  • Cancer Treatment - You are undergoing or recently underwent cancer treatment
  • Economic Hardship - You’re in the Peace Corps or are experiencing qualified economic hardship
  • Graduate Fellow - You’re in a qualifying graduate fellowship program
  • In-School - You’re enrolled in an eligible college or career school at least half-time 
  • Military Service and Post-Active Duty Student - You are or were recently on active military service
  • Parent PLUS Borrower - You took out a loan for a dependent who is enrolled in an eligible college or career school at least half-time 
  • Rehabilitation Training - You’re enrolled in a qualified rehab training program
  • Unemployment - You’re unemployed but actively looking for jobs

Most federal loan borrowers who are still enrolled in an eligible school half-time or more, will usually have their loans automatically deferred until graduation. 

To access the application forms for the individual deferment programs and see more specific criteria, visit the government website

What types of federal forbearance are available? 

There are two types of federal forbearance programs: General forbearance and Mandatory forbearance. 

General forbearance is available at the discretion of the loan servicer but is usually granted in cases of financial difficulties, medical expenses, and changes in employment. It may also be granted by the loan servicer for other reasons. Any borrowers with Direct loans, FFEL loans, and Perkins Loans can apply for general forbearance but please note that borrowers may not receive more than 3 years total of general forbearance. 

Mandatory forbearance programs have other eligibility requirements, but if a borrower meets them, loan servicers must grant their forbearance request. Mandatory forbearance may be granted

  • for borrowers in AmeriCorps, Department of Defense Student Loan Repayment Programs, Medical or Dental Internship or Residency programs, or National Guard Duty
  • for borrowers with a high monthly student loan debt burden that is more than 20% of their gross monthly income or 
  • borrowers who are performing a teaching service that would qualify them for teacher loan forgiveness 

You can download the applications for specific forbearance programs here.

All borrowers must apply for both types of forbearance with their loan servicer and may only receive up to 12 months of forbearance at a time. At the end of a forbearance period, it may be possible to reapply for more forbearance.

Borrowers may only receive up to 12 months of forbearance at a time. At the end of a forbearance period, it may be possible to reapply for more forbearance.

What are the benefits of deferment and forbearance?

The biggest benefit of deferment and forbearance is that both programs provide borrowers with temporary relief in the event that a borrower is suffering from financial hardship and cannot afford to make their monthly minimum payments. With both programs, borrowers are able to stop making payments on their student loans without risking delinquency, or worse, default. 

With both programs, borrowers are able to stop making payments on their student loans without risking delinquency, or worse, default.

What are the risks of deferment and forbearance?

There are several major risks to pursuing federal deferment and forbearance: 

  1. Neither program is automatically granted
  2. Relief is temporary 
  3. Possible interest capitalization at the end of the grace period 
  4. A pause on progress made towards federal loan forgiveness

Neither federal program is guaranteed

Borrowers looking for a way to lower their monthly minimum payments should not assume they will automatically be able to use deferment or forbearance programs as a temporary relief option. In order to receive federal deferment or forbearance, borrowers need to apply with their loan servicers, prove their eligibility, and be approved by their loan servicer before they can stop making payments on their loans. Until borrowers are notified by their servicers that their requests for deferment or forbearance have been approved, they must continue making payments on their student loans or else their loans will become delinquent or go into default. 

Payments are only temporarily suspended

While borrowers on deferment or in forbearance are able to stop making payments on their student loans, the break in payments is only temporary and eventually they will have to resume responsibility for their loan payments again. Before applying for forbearance or deferment, borrowers with federal loans may want to consider applying for an IDR so that they may both lower their monthly minimum payment and have any outstanding loan balances forgiven at the end of their repayment period. 

Possible Interest Capitalization

While borrowers do not need to make payments on their student loans during any sort of deferment or forbearance period, interest may still continue to accrue on their outstanding loan balance. If a borrower does not pay off the interest as it accrues OR does not pay off the interest at the end of the deferment or forbearance period, the accrued interest may be capitalized, or added back, into the loan principal. Capitalized interest will increase a borrower’s outstanding loan balance and will cause them to pay more in interest over the life of the loan.  

Pausing progress towards forgiveness

Federal borrowers who are working towards federal loan forgiveness, and who stop making payments while their loans are deferred or in forbearance, will also stop making progress towards forgiveness until they resume payments on their loan. Unlike with IDR plans, where one may still receive credit towards loan forgiveness for a period even if their minimum monthly payment is $0, federal borrowers in forbearance or default will not have any of the deferment or forbearance time counted as part of their total number of required payments. 

How do I apply for deferment or forbearance? 

Borrowers with federal student debt will need to apply for deferment or forbearance with their loan servicers. Borrowers interested in federal deferment can access the application forms for individual deferment programs and see more specific criteria, here;  Borrowers interested in federal forbearance can download the applications for specific programs here.

What does deferment or forbearance look like for borrowers with private student loans? 

Borrowers with private student loans should contact their loan servicer to see what deferment or forbearance-like options are available to them. Some (but not all) private lenders do offer forbearance and deferment programs that, like the federal programs, will let borrowers temporarily stop making payments under specific circumstances (but interest likely will continue to accrue). These programs have similar pros and cons as the federal deferment and forbearance programs. 

Need more help paying off your student loans?

Talk to your employer about offering a student loan repayment benefit with Highway. Send your HR team our guide to employer student loan repayments to get the conversation started today.

The Highway Team

The Highway Team is on a mission to spread knowledge about student loans, the state of the student debt crisis, and impactful benefits like employer student loan repayments. We're here as a helpful resources so drop us a line anytime. Find us on all the major channels as @highwaybenefits

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