According to the latest annual report from the Institute for College Access and Success, 2015 college graduates showed a 4% increase in student loan debt over 2014 graduates. Among 2015 seniors, 68% who graduated had student loan debt, with the average balance being $30,100 per borrower.
With more college students graduating with student loan debt and balances continually increasing, it’s no wonder many are seeking deferment or forbearance. But if you are considering these options, there are some things you need to know first, including how it might affect your credit score.
What Is Deferment?
Student loan deferment is a period of time when the repayment of your loan’s principal and interest is temporarily delayed.
Unlike forbearance, when your student loan is in deferment, you do not need to make payments. And in some cases, the federal government may even pay the interest portion of your student loan payment. In order to qualify, you must have a federal Perkins Loan, a Direct Subsidized Loan, or a Subsidized Federal Stafford Loan.
Interest on your unsubsidized student loans or any PLUS loans will not be paid by the federal government. You will be responsible for interest accrued during deferment (if it’s not paid by the federal government), but you don’t have to make payments during the deferment period. If you’re not paying interest during deferment, it’s important to know interest may still be added to your principal balance. This may result in higher future payments.
There are several situations in which you may be eligible for student loan deferment:
- If you are enrolled in college or career school at least half-time
- If you are in an approved graduate fellowship program
- During a period where you have qualified for Perkins Loan discharge or cancellation
- During a period of unemployment
- During a time of economic hardship (including Peace Corps)
- During active military duty
- During the 13 months following active military duty
Most deferments are not automatic, and you will need to submit a request for deferment to your student loan provider. If you are still in school at least part-time, you can apply through your school’s financial aid office.
What Is Forbearance?
If you are unable to make your student loan payments and don’t qualify for deferment, your loan officer may allow forbearance. When your student loans are in forbearance, you may be able to make smaller payments or skip payments altogether for up to 12 months.
However, before you apply for forbearance, keep in mind that interest will continue to accrue on all types of loans. This means your balance will grow, increasing the amount of time and money it will take to pay off your student loans. You can choose to pay the interest-only portion during forbearance. If you choose not to, the interest may be capitalized and added to the principal balance of your loan.
According to the Federal Student Aid office at the U.S. Department of Education, there are two types of forbearance, discretionary forbearance and mandatory forbearance.
Discretionary forbearance is when you, the borrower, request forbearance from your lender due to financial hardship reasons or illness. Ultimately, the lender decides whether or not to grant your discretionary forbearance request.
With mandatory forbearance, your lender is required to grant you forbearance on your student loans if you request it. However, you must meet the following criteria:
- You are completing a medical or dental internship or residency program, and meet specific requirements.
- The total you owe each month for all the student loans is 20% or more of your total monthly gross income.
- You are serving in a national service position and received a national service award.
- You are a teacher and qualify for teacher loan forgiveness.
- You qualify for partial repayment of your loans under the U.S. Department of Defense Student Loan Repayment Program.
- You are a member of the National Guard and have been activated by a governor, but you are not eligible for a military deferment.
- Similar to deferment, forbearance doesn’t happen automatically. You must apply for forbearance and may be required to show proof of these situations in order to be granted forbearance.
What Happens to Your Credit Score When Your Student Loans Are in Deferment or Forbearance?
As long as you continue making your student loan payments on time and in full until your request for deferment or forbearance is approved, your credit score should not be affected.
According to Rod Griffin, Director of Public Education at Experian, “When a student loan is in forbearance it is not in a repayment status. As a result, the late payments would not be reported. If it is reflected as current and not in repayment, it likely would not have a negative effect on credit scores.”
What Happens if You Default on Your Student Loans?
If you miss a payment between the time you apply for and are approved for deferment or forbearance, you will be considered to be in default on your student loans, and your credit score could be negatively impacted by this missed or late payment.
“Defaulting on a student loan is no different than defaulting on any other installment loan. Failing to pay as agreed will severely damage your credit history and, therefore, your credit scores,” Griffin said.
Being 60 days late or more on a student loan or credit card payment could damage your credit score as much as 100 points.
The Bottom Line
If you are unable to afford your student loan payments, deferment or forbearance may be options to consider. However, it’s important to remember that your student loans will continue to accrue interest, which could result in your paying more over the long run. Between the time of application and the time you are approved for deferment or forbearance, you must continue to make your student loan payments in full and on time in order to avoid potential damage to your credit score.