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Deferment and forbearance are handy tools for temporary financial emergencies. But using them at the wrong time could end up costing you thousands of dollars in interest — without really solving any deep financial issues.
Between March 13, 2020 and September 30, 2020, the Department of Education is automatically deferring repayments on all federal student loans. This has since been extended to September 30, 2021. You won't accrue any interest during this period.
Some private lenders are offering forbearance, but interest may still build on your loans. If you have a private loan, or to learn more about current government actions, read our guide to COVID-19 student loan assistance.
Deferment and forbearance will be more expensive for almost every borrower in the long run. Here are a few reasons you should avoid missing payments.
Unsubsidized federal loans and private student loans continue to accrue interest while in deferment or forbearance. And at the end of your deferment or forbearance period, all that interest will be capitalized into — or added to — your loan principal. This means you'll end up owing more on your loan. Coupled with an extended loan term, you'll pay a pretty penny toward interest.
There are multiple repayment programs available for federal student loans to help reduce your monthly repayment. So if you can afford to pay a small amount, change your repayment plan or apply for income-driven repayment.
Private borrowers don't have quite so many options. While you may be able to lower your monthly payment, most lenders aren't going to be flexible. In these cases, it may be better to refinance your private loans for a longer term. While you'll pay more in interest, you may be able to lower your monthly payment to an affordable level.
If you're unemployed or struggling to make ends meet — and there's no end in sight — deferment or forbearance won't be the right choice. Both programs only last so long — and if your situation hasn't improved, the increased costs could make a bad situation worse.
Plus, lenders can cap deferment and forbearance. If you reach that cap, you won't be able to apply again. Even in a tough financial situation, deferring payments or forbearing your loan should be left for the worst-case scenario.
If you have private student loans, refinancing may be a way to lower your monthly payment. Keep in mind that a longer term — and lower monthly payments — can mean more interest built up over the life of the loan.
There are a few times you should opt for deferment or forbearance:
Deferring or forbearing your student loan payments is a short-term solution that will end up costing you. The longer you postpone payments, the more you'll end up paying.
But it's far from the only option when you're facing a financial setback. And if you have private loans and a solid credit score of 670 or higher, refinancing your student loans may help lower your monthly payments.
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