I actually don't know many people with student loans who have NOT at one time or another requested a forbearance or deferment of their student loan payments. With both you will either not have to make any payments for a short period of time, or you will have to make reduced payments. Let's take a closer look.
Deferment: Student loan payments are suspended for a certain period of time due to a myriad of circumstances (unemployment, returning to school or economic hardship are most common). Interest will be paid by the government on subsidized loans during this period, but not on unsubsidized loans. If you don't pay the interest on unsubsidized loans during this time, it will be tacked onto the principal and it will compound.
Forbearance: Forbearance may be granted in cases where you do NOT qualify for deferment. Student loan payments are suspended or decreased for a certain period of time due to a myriad of circumstances. You will pay interest on both subsidized AND unsubsidized loans. If you don't pay the interest on either loan during this period, it will be tacked onto the principal and it will compound.
What does compounding mean? Essentially you will pay INTEREST ON TOP OF INTEREST. I will discuss this further in a future post. And while compounding interest is great for investors in order to build wealth, it is a nightmare for borrowers. Ever hear the old adage "money makes money?" Compound interest is one of the many reasons why.
Most pay dearly for this "out", and you can't delay paying your loans forever. If you have a $50,000 loan at 6% interest, you are paying $250/mo in interest. A 6 month deferment/forbearance results in $1,500 in interest alone! If it is not paid, the principal becomes $51,500! In addition there are limits to how long the government will pay the interest on your subsidized loan in the case of deferment.
Here is some further information for those having difficulty repaying their loans:
http://studentaid.ed.gov/PORTALSWebApp/students/english/difficulty.jsp
Pros:
- You will not go into default on your student loan
- Your student loan payment will be suspended or decreased temporarily allowing you time to get on your feet financially
- Deferment is essentially free for subsidized student loan holders
- The principal on your loan will not increase as long as you pay any accrued interest that you are responsible for
Cons:
- The principal on your loan will not decrease during times of deferment or forbearance
- The principal on your loan will actually INCREASE during periods of deferment (unsubsidized loan borrowers) and forbearance (unsubsidized and subsidized loan holders) IF ACCRUED INTEREST IS NOT PAID
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