Know Your Grace, Deferment and Forbearance

Student loan repayment begins after you graduate or leave school. Under certain circumstances, you may delay repayment. In these cases, you use your grace, deferment and forbearance options, and you will generally use them in that order.

Grace

The period of time after you graduate (or withdraw or go below half-time) during which you need not make payments. No application is required. The amount of time varies – for the Stafford loan there is a 6 month grace period. Interest stays subsidized on subsidized loans but starts accruing on unsubsidized loans.

Deferment

Period when a borrower who meets certain criteria may suspend loan payments. Application is required annually. Interest stays subsidized on subsidized loans but starts accruing on unsubsidized loans.

Borrowers who borrowed their first Stafford, GSL or SLS loan after July 1, 1993 are eligible for 5 types of deferments on Stafford loans:

§ In-School – attending an eligible institution at least half-time

§ Unemployment – seeking but unable to find full-time employment

§ Rehabilitation Training – participating in a full-time rehabilitation training programme.

§ Graduate Fellowship – enrolled in a full-time graduate fellowship programme

§ Economic Hardship – experiencing an economic hardship based on a government formula. For economic hardship eligibility two conditions must be met:

1. the borrower’s total monthly loan payments on Federal education loans amortized over 10 years must equal or exceed 20% of their monthly gross income
2. the borrower’s monthly gross income minus total monthly loan payments as described above must be less than $2,420 (2005-2006, subject to change each year).

Eligible loans for economic hardship include: Stafford, GSL, SLS. Not included are private education loans, credit card debt, mortgages or car payments. Monthly gross income refers to the borrower only. Poverty level, interest rates and income can change each year, so deferments must be applied for each year. If you qualify for each year, you may defer for up to three years. Your loan servicer can calculate the numbers for you, but be sure that they are aware of all your federal education loans.

Forbearance

A temporary adjustment (no payments, lower payments) to the repayment schedule in cases of financial hardship which is granted at the servicer’s discretion. Application is required at least annually. In general you would apply for forbearance after your grace and deferment eligibilities are exhausted. In forbearance interest accrues and capitalizes on all loans subsidized and unsubsidized so it is expensive and should only be used to avoid delinquency and default.