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.
Deferment
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:
- Economic Hardship - borrowers are entitled to an economic hardship deferment for periods of up to one year at a time, not to exceed three years cumulatively, having provided the school with satisfactory documentation showing they fall into any of the following categories:
- Has been granted an economic hardship deferment for either a Stafford or PLUS Loan for the same period of time for which the Perkins Loan deferment has been requested
- Receives federal or state public assistance, such as Temporary Assistance to Needy Families (formerly, Aid to Families with Dependent Children ), Supplemental Security Income, food stamps, or state general public assistance
- Works full time and earns a total monthly gross income that does not exceed 150% of the poverty line for the borrower's family size
- Serves as a volunteer in the Peace Corps
- Additional conditions and qualifications can also apply. Contact your lender to discuss your possible eligibility.
- Unemployment - a borrower may defer repayment on a Perkins Loan for up to three years, regardless of disbursement date and contrary provisions on the promissory note, if seeking and unable to find full-time employment. The school may determine the documents a borrower must provide when applying for this type of deferment.
- Fellowship - Borrowers may defer repayment if enrolled and in attendance as a regular student in a course of study that is part of a graduate fellowship program approved by the Department of Education, including graduate or postgraduate fellowship-supported study (such as a Fulbright Grant ) outside the United States.
- Pre-Cancellation Services - A borrower must file a pre-cancellation deferment at the beginning of each qualified year of service if wishing to apply for employment cancellation benefits at the end of every year of qualified service. This ensures the borrower is not billed during the year and not expected to make payments during that time. Such borrowers will subsequently qualify to cancel a portion of their loan due to employment services. (also see Cancellation below)
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
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.
Cancellation
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:
- Teacher Cancellation - You qualify for cancellation (discharge) of up to 100% of a Federal Perkins Loan if you have served full time in a public or nonprofit elementary or secondary school system as a:
- teacher in a school serving students from low-income families; OR
- special-education teacher, including teachers of infants, toddlers, children, or youth with disabilities; OR
- teacher in the fields of mathematics, science, foreign languages, or bilingual education or any other field of expertise determined by a state education agency to have a shortage of qualified teachers in that state
- Child or Family Services Loan Cancellation - for those who work full time for a public or nonprofit child- or family-services agency providing services to high-risk children and their families from low-income communities
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.
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Repayment
Introduction to Repayment
Starting Repayment
Knowing ‘the basics’ before making that first payment
Repayment Plans
Understanding the many choices offered
Deferments / Forbearance / Cancellations
Making use of benefits
Loan Consolidation
Determining the advantages and disadvantages