You’ve been hit with a financial shock, a sudden job loss, an unexpected medical bill, or another personal emergency that makes paying your upcoming student loan or mortgage payment feel impossible. It’s a terrifying situation, and your first instinct might be to simply ignore the bill and hope for the best.
However, ignoring your loan payments is the worst thing you can do. It can lead to delinquency, default, and severe, long-lasting damage to your credit score, making it much harder to get financing in the future.
Fortunately, lenders provide two proactive solutions to help you navigate these exact situations: forbearance and deferment. Both options allow you to temporarily pause your payments without ruining your credit. This guide will clearly define both forbearance and deferment, highlight the critical differences in how they handle interest, explain who is eligible, and help you decide which one is the right choice for your financial situation.
The Core Concepts: A Temporary Pause Button
At their core, both deferment and forbearance act as a temporary “pause button” on your loan payments, giving you breathing room during a difficult time.
- What is Deferment? Deferment is a formal, structured postponement of your loan payments. Eligibility is tied to specific, documentable events. For certain types of loans, like subsidized federal student loans, a major benefit is that you may not have to pay the interest that accrues during the deferment period.
- What is Forbearance? Forbearance is also a temporary pause or, in some cases, a reduction of your monthly payments. The key difference is that with forbearance, interest continues to accrue on all loan types and is typically added to your principal balance later.
The most important similarity is that both are official agreements with your lender designed to help you avoid default during a period of financial hardship.
The Critical Difference: How Interest Is Handled
The single most important factor that separates deferment from forbearance is how they treat the interest that accumulates while you aren’t paying. This difference can save you—or cost you—a significant amount of money over the life of your loan.
Deferment: The Best-Case Scenario
- For Subsidized Loans: If you have a subsidized federal student loan, deferment is a huge advantage. During an approved deferment period, the U.S. government pays the interest on your behalf. Your loan balance will not grow, and you won’t face a larger debt when you resume payments.
- For Unsubsidized Loans: For all other loan types, including unsubsidized student loans, private loans, and mortgages, interest does accrue during deferment. At the end of the period, this accumulated interest will be capitalized, meaning it is added to your original loan balance.
Forbearance: Interest Always Accrues
This is the golden rule of forbearance: you are always responsible for the interest that accrues during the forbearance period. This applies to all loan types, with no exceptions.
This unpaid interest is then capitalized. Capitalization is a critical concept to understand. For example, let’s say you enter forbearance with a loan balance of $20,000. Over the next few months, you accumulate $500 in unpaid interest. At the end of the forbearance, that $500 is added to your principal. Your new loan balance is now $20,500, and your future interest charges will be calculated based on this new, higher amount. This is why forbearance can make your loan more expensive in the long run.
Eligibility: Who Qualifies for Each?
Deferment
Eligibility for deferment is strict and requires you to meet specific, documentable criteria. Common qualifying events for federal student loans include:
- Being enrolled at least half-time in college or a trade school.
- Being unemployed or unable to find full-time employment.
- Experiencing a defined economic hardship.
- Serving on active duty in the military.
Forbearance
Eligibility for forbearance is generally more flexible and is often granted at the lender’s discretion for financial hardships that don’t fall neatly into the deferment categories. Common reasons include:
- A temporary illness, injury, or disability.
- Unexpected or high medical expenses.
- A change in employment that reduces your income but doesn’t qualify you for an unemployment deferment.
How to Apply and What to Expect
If you’re facing financial trouble, you must be proactive. Follow these steps:
- Contact Your Lender Immediately: Do not wait until you’ve already missed a payment. Call your loan servicer, explain your situation, and ask what options are available.
- Submit an Application: You cannot simply stop paying. Both deferment and forbearance require you to submit a formal application, which will likely require providing documentation to prove your hardship (such as termination letters or medical bills).
- Keep Paying Until Approved: This is critical. Continue to make your payments, if at all possible, until you receive official written confirmation that your request for deferment or forbearance has been approved. If you stop paying before the agreement is finalized, you will be reported as delinquent.
Key Takeaways
Both deferment and forbearance can be absolute lifesavers during a financial crisis, protecting your credit and giving you time to get back on your feet. However, they are not a free pass. With the exception of subsidized loans in deferment, interest is always accumulating in the background, making your loan more expensive over time.
Therefore, the recommendation is clear: always check if you qualify for deferment first. It is the more financially advantageous option in almost every scenario where it’s available. If you don’t meet the strict criteria for deferment, forbearance serves as a valuable and essential safety net.
If you are struggling to make your payments, don’t wait. Contact your loan servicer today to discuss your options. Taking action now is the most important step you can take to protect your financial future.
