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Plan Well, Retire Well

Saving and investing your money

Additional student loan repayment options: Deferment, forbearance, and consolidation


This is the third post in a series about student loans by guest blogger Sharon Cabeen. Sharon is director of financial literacy program operations with TG. You can reach her at (800) 252-9743, ext. 6781, or by email at sharon.cabeen@tgslc.org. Additional information about TG can be found online at www.tgslc.org.

As we all know, the job market in the current strained economy is challenging at best, meaning that today's college graduates have to work harder to land job opportunities than their predecessors a few years ago. But of course, navigating the job market without a college degree can be more difficult still, making a college degree a crucial asset for every new job seeker.

Given these challenging circumstances, many recent grads may find it difficult to begin or continue repayment of their student loans. As I described in a recent post, the federal student loan program provides a variety of repayment plans to suit a borrower's needs. These plans can help lower monthly payments and (under certain circumstances) even forgive remaining debt at the end of a preset repayment period.


But what if these options don't go far enough? While flexible, these plans may not provide the immediate relief a borrower needs, or they may not address the particular circumstances a borrower faces.

Thankfully, borrowers have options. This post focuses on deferment, forbearance, and consolidation, paths that may help borrowers address these difficulties and stay on track for successful repayment.

Deferment

Sometimes, even a borrower's best-laid plans for student loan repayment can be affected by life's changes – such as the loss of a job, a difficult economic stretch, or maybe a decision to go back to school.

In situations like these, a borrower may not be able to make his or her monthly payment. To find relief, the borrower should consider applying for a deferment, which will allow him or her to postpone repayment of their loans. For subsidized undergraduate loans, the government pays the interest during the deferment period. Importantly, deferments are entitlements, meaning that if a borrower qualifies for one, the lender or servicer is required to grant it.

Nine types of deferment are available that cover a variety of situations. The most common deferments are in-school, unemployment, economic hardship, and military deferment.

Forbearance

If a borrower doesn't qualify for deferment, he or she may request a forbearance. Forbearance is similar to deferment in that it can provide a borrower relief from student loan payments. Under forbearance, a loan holder or servicer temporarily permits a borrower to cease making payments, provides an extension of time for making payments, or temporarily accepts lower payments than were originally scheduled.

Forbearance differs from deferment in that while a deferment is an entitlement, a forbearance is generally granted at the lender's discretion. As mentioned above, during a deferment, the interest on subsidized undergraduate loans is paid for the borrower. During forbearance, on the other hand, interest continues to accrue unless the borrower makes interest payments. The interest is capitalized, increasing the principal balance of the loan along with the amount of interest the borrower must pay in the future.

While obtaining a forbearance is better than missing loan payments, deferment is the less costly option. Borrowers interested in forbearance should check with their loan holder or servicer to see if they qualify for a deferment first.

Consolidation

For a variety of reasons, many borrowers have multiple loans issued by multiple loan holders. When they leave school, they find themselves having to make payments on each loan each month, with different payment amounts to different locations. Keeping up with all of this can be confusing, to say the least.

A borrower in this situation may be able to combine – or consolidate – them into one loan. Under this program, the Department of Education issues a new loan (the Consolidation loan) to pay off the remaining balances of each loan the borrower took out. The borrower then has to make just one monthly payment to one loan holder.

Borrowers can also usually extend their repayment period by consolidating, although this of course increases the amount of interest they pay over the entire repayment term. Because consolidation is often a one-time decision, however, borrowers should learn as much as possible before deciding to consolidate.

For more information

For more information about each of these options, as well as links to relevant forms borrowers can use to help choose one of them, visit TG's Helpful Repayment Options page.



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