There’s no denying the value of a college education. With countless surveys and studies, there’s more than enough evidence to prove that consumers with college degrees earn more over their lifetimes than those without. The downside, however, is the cost that often comes with earning that highly sought-after degree.
Outstanding student loan debt has topped the $1 trillion mark. and if rising delinquency rates are any indication, more and more Americans are finding it hard to make good on their student loan payments. Unfortunately, as with any other type of loan or credit obligation, falling behind or defaulting on a student loan can wreak havoc on your credit.
This doesn’t stop “life” from happening, though, and despite our best intentions, we can’t always control financial setbacks. If you’re having trouble maintaining your student loan payments, a deferment or forbearance may give you some breathing room while you work to regain your financial footing. Both offer a temporary reprieve on student loan repayments, which is important since student loans are rarely dischargeable in bankruptcy. The key is deciding which option is right for you and understanding the primary differences between them.
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Deferment vs. Forbearance
Deferment and forbearance are similar in that they both allow you to put your student loan payments on hold, temporarily suspending your minimum monthly payment obligations. If you’ve suffered a job loss or other economic hardship, you may be eligible for a deferment or forbearance through your lender, though eligibility and terms will vary from lender to lender. In general, the time frames for temporary relief on student loans can range anywhere from a month or two to a year or longer.
The main difference between a deferment and forbearance is the interest. In the case of deferments, you maybe able to save on interest depending on whether or not your loan qualifies as an eligible government-subsidized loan. If your loan is a subsidized government loan, the interest is subsidized at a much lower rate and in some cases, you may not be charged any interest at all while the loan is in deferment.
For this reason, deferments are often harder to qualify for. With forbearance, even though you aren’t obligated to make the monthly payment, you will continue to accrue the full rate of interest on any outstanding loan balance.
One of the most common questions about forbearance and deferment is how they affect your credit and which, if either, causes the least amount of damage to your credit scores. The good news? Student loan deferments have no impact whatsoever on your credit scores. The same is true for student loans in forbearance. Both are noted in your credit reports, but neither indicator will
hurt your credit score.
However, if you are late or miss a payment prior to being approved for a deferment or forbearance, your score will suffer. The key to protecting your credit is to act quickly — don’t wait until you’ve fallen behind to reach out to your lender and explore your options. And it’s always a good idea to keep an eye on your score, no matter what. Credit.com’s Credit Report Card is one service that lets you check your credit score every month for free.
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Deanna Templeton is a financial literacy advocate with 15+ years in the banking and consumer credit industries, including five years with FICO in their credit scoring division. She specializes in educating consumers on the importance of healthy credit management, and shares valuable insight on consumer credit and finance issues.
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