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Student Loan Forbearance and Deferment: Is it Bad for My Credit?

Cecily Kellogg December 10, 2018

Often, those with student loans feel trapped by their debt. No matter how much money they make, they frequently have issues paying their bills on time and in full. What most people do not know is that in these situations, they have options for easing their stress and payment load. The two that borrowers most commonly use are forbearance and deferment. Below, we explain these two concepts, tell you if they lead to bad credit, and give you some general tips on student loan management.

The Student Loan Problem

You’ve probably heard about student loan issues in the news, but you may not know precisely how bad it is. Take a look at the following statistics to further your understanding.

• Total Borrowers: 44.5 million
• Total Debt: 1.5 trillion
(Source: Federal Student Aid)

• Number of borrowers using deferment: 3.3 million
• Number of borrowers utilizing forbearance: 2.6 million
(Source: Federal Reserve Bank of NY)

If you are struggling with student loans, realize that you are not alone. There are an incredible amount of people that are in the same position as you. Additionally, there are ways to lighten your financial burden and make paying your debt easier. Two of the most effective methods are student loan forbearance and student loan deferment.

Defining Student Loan Deferment

This financial strategy describes a delay in your responsibilities to pay principal and interest payments on your debt. The following are a few ways this can help you pay your loans.

1. Save Money

Many borrowers can make payments every month, but their financial situation is incredibly stressful due to a lack of savings. What deferment can do is quell this anxiety by giving you some breathing room. When you take time off from paying your debt, you can build up your savings and have more security going forward.

2. Recoup

Sometimes, a debt situation is so bad that the former student is overwhelmed. This mental state leads to a variety of mental health and lifestyle consequences. Taking a break from payments allows them to recoup.

3. Increase Earnings

Whether you don’t have a job or have one with a somewhat low wage, making payments can be difficult. If you utilize student loan deferment, you get a chance to raise your income. This can come in the form of an unemployed person getting a job or an underemployed person raising their wage.

4. Craft a New Plan

Sometimes, a person is making enough money but doesn’t have the right financial system in place. Without a strategy, their efforts to pay off debts fail. Delaying payments can allow them the time and perspective to create a new plan going forward.

The specific terms of this method differ depending on what kind of loan you have. For Perkins loans, direct subsidized loans, and subsidized Stafford loans, you may not have to pay any interest accrued during this time. If you have a different type of loan, like unsubsidized or PLUS, you will have to pay interest once your student loan deferment is over.

Am I Eligible For Student Loan Deferment?

Though there are a variety of situations in which you can use student loan deferment, the following are the most prevalent.

1. You Are In College

If you are still receiving education, even it if just part-time, you are eligible. This most frequently happens when students go to graduate school. As they get further schooling, they are not expected to pay their debts.

2. You Are Unemployed Or Only Part Time

If you cannot find a job or found one that is only part-time, you should look into deferment. Doing so will allow you some time to find sufficient employment before making payments.

3. You Are Experiencing Financial Issues

Your money problems do not have to fit into a narrow category to make you eligible for deferment. Instead, many situations may suffice. You can apply at any time to figure out if your circumstances meet the requirements.

Does Student Loan Deferment Give You Bad Credit?

Some borrowers wait until they miss multiple payments before applying for a deferment. If this is the case for you, every bill you missed will contribute to bad credit. Luckily, deferment does not affect credit score on its own. If you apply for it before making any mistakes, your score will stay intact.

Defining Student Loan Forbearance

If you do not qualify for a deferment, student loan forbearance is your next option. It is similar to deferment, in that you delay making full payments, but it has a couple of crucial differences. First, it can only last for a maximum of twelve months. Once that time is up, you must continue paying in full or request another forbearance. Second, forbearance often involves reduced payments, rather than not paying at all.

Am I Eligible For Student Loan Forbearance?

There are two variants of student loan forbearance. Each of them has different eligibility requirements.

1. Discretionary

You can request a discretionary forbearance from your lender at any time. When you do, it is up to them whether or not they want to grant it. You can apply for one based on general financial issues, medical bills, and many other circumstances.

2. Mandatory

In this situation, your lender must accept your request. Common reasons for these types of forbearances are your bills being more than 20% of your income, being in the armed services, and enrollment in a loan forgiveness program for teachers.

Does Student Loan Forbearance Give You Bad Credit?

Just like deferment, forbearance also does not give you bad credit, but missing payments before applying for it will. To avoid this penalty, be honest about your finances and make a move early if you believe that you cannot handle your monthly payment.

Best Practices For Paying Loans

If you understand credit scores, you know one of the worst things you can do is missing payments. Doing so regularly will inevitably lead to bad credit, which will make your life much harder. Following a few of the critical loan paying best practices can help you avoid this issue.

• Pay on Time

You should try to never miss a payment. If you are in danger of doing so, talk to your lender for help.

• Pay Extra if Possible

Don’t think that you need to stick to your lender’s payment plan. If you have extra cash, pay more than your minimum.

• Make a Budget

Paying on time and in full is easier said than done. To make it happen, try making a budget, which will allow you to cut costs and have more money to devote to your debt. • Consider Consolidating

If you are dealing with high interest on multiple loans, you should look into consolidating your debt with one lender at a lower rate.

If you have student loans and believe that you may not be able to make your payments, understand that this situation is not the end of the world. Not only are many other borrowers out there experiencing the same issues, but you also have forbearance and deferment as options for delaying or reducing your payments. Not only will taking advantage of these strategies ease your financial burden, but they also will not give you bad credit. For these reasons, exploring deferment and forbearance is well worth your time.

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