Deferment, forbearance and cancellation--all three of these terms can be found in most student loan agreements or promissory notes. But what do they mean? How do they work? When should you use them? These are the most common (and important) questions asked by student loan borrowers. The first two terms, deferment and forbearance, define certain rights borrowers have under their loan agreement with their lender that allow them to postpone making payment on a student loan. The third term, cancellation, refers to ways that a student loan can be reduced or 'cancelled', in part or in whole. These three words however lead to a variety of possibilities.
Within almost every student loan agreement are terms allowing a borrower to defer loan payments or pay at a later date. The most commonly used deferment is the Student Deferment. The Student Deferment allows borrowers who have returned to a federally-designated institution of higher learning (a school assigned a Federal OPE Code) to defer their loans for the time period they are enrolled at least half-time. In most cases, students cannot withdraw before the end of the term or the deferment will be reversed.
In addition, there are several others types of deferments, including:
The terms of your loan specify how to qualify for the deferments. Speak to your lender if you think you may be eligible for a deferment based on the terms of your student loan. REMEMBER - not all student loans have the same terms, and chances are that you may have received loans from more than one lender. Make sure to discuss deferment availability and how to qualify with the actual lender of the loan (or that lender's billing servicer).
Forbearance is defined as a temporary cessation of student loan payments due to an inability to make payments as caused by financial hardship. Forbearance is available to borrowers of all federal student loans such as Stafford and Perkins, as well as some private loans. With forbearance, you are allowed to apply for a temporary suspension of your payments.
The crucial difference between forbearance and an economic hardship deferment or unemployment deferment (which in the case of the latter two are also granted in financial hardship situations) is that although forbearance can be obtained more readily than the two deferments mentioned, interest continues to accrue during the forbearance period, even on subsidized student loans. In addition, the forbearance period is counted into the maximum repayment period. This means if you were given ten years to repay your student loan at a consistent defined amount, and you were then granted forbearance, the ten-year repayment period would not be extended as the time in forbearance would be counted as part of the ten years. In turn, this could trigger either an increase in your future regular payment amount or raise the amount of your final payment at the close of the ten-year repayment term.
There are several types of loan cancellations available to student loan borrowers depending on the type of loans they have. The more common cancellations associated with the Perkins Loan are the:
If you qualify for these or any of the other types of employment cancellations, your loan balance will be partially reduced, year-by-year, according to a pre-established cancellation schedule.
It is especially important to know to what employment cancellations you are entitled, so that you do not lose out on the benefit. For example, if you consolidate a Perkins Loan, you will lose your Perkins Loan cancellation privileges under the terms of the consolidation, as the consolidation loan money will pay off the Perkins Loan. Likewise, if you make payments to a loan and later found out that you were working in a field that allowed you cancellation rights, the payments you already made will not be refunded. Contact the lender of the loan (or its billing servicer) for more details on qualifying for and obtaining a cancellation.
Introduction to Repayment
Knowing ‘the basics’ before making that first payment
Understanding the many choices offered
Deferments / Forbearance / Cancellations
Making use of benefits
Determining the advantages and disadvantages