3 reasons to avoid student loan deferment or forbearance

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.

When should I avoid deferment or forbearance?

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.

You have unsubsidized or private student loans

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.

You can afford smaller monthly repayments

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.

Your financial situation isn't going to improve

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.

See student loan refinancing options

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.

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So when should I defer or forbear my loans?

There are a few times you should opt for deferment or forbearance:

• You have subsidized student loans. The government pays interest on subsidized federal loans when you enter deferment, which means you won't have that interest added to your loan. But if you plan on forbearing, you'll be in the same boat as borrowers with unsubsidized loans.
• You are facing temporary financial hardship. If you recently lost your job or have a few extra bills to pay, deferment or forbearance may be the right choice. It can help you get back on your feet when you know you'll have more money coming your way soon.
• You are returning to school. Students returning to an undergraduate or graduate program may want to defer their federal loans. Medical professionals entering a residency may want to enter forbearance on federal loans. Private student loans may offer these options, but it's rare.
• Your are entering military or civil service. Military members on active duty and Peace Corps or Americorps volunteers may qualify for deferment or forbearance on their federal student loans. Most private lenders also offer military service deferment, and you may qualify for economic hardship deferment as a civil service volunteer.

Bottom line

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.