File this one under hope it doesn’t happen, but what if you are suddenly unable to make payments on your student loan debt. At all. Let’s say you are accused of malpractice or lose your license, or perhaps you suffer a debilitating injury. Or maybe the hospital you were working for suddenly goes belly up, and you’re stuck in a giant jobless rut. There’s also the possibility that you don’t get matched to a residency. The thousands of dollars you owe for medical school don’t suddenly disappear. One option is to default on your debt. This is a shortcut to financial ruin and a guaranteed way to destroy your credit. Don’t do this. Depending on your circumstances, forbearance or deferment may be your best bets, according to Nate Reineke, a planning technician and student loan specialist at Physician Family Financial Advisors. “In those scenarios, it’s an option that I’m glad is out there,” Reineke says. “But you can be sure that it comes with a cost, and that’s the interest rate. There’s no benefit besides giving you breathing room for month-to-month living.” What is Deferment? The terms deferment and forbearance are often used interchangeably, but they are very different. Deferment will give you a break from making payments on your loan. The balance remains unchanged and you do not have to pay accruing interest while you are in deferment. Some of the events that qualify you for deferment include: Going back to college Enrolling in a rehab program after a disabling injury You are unemployed and searching for a job for up to three years What is Forbearance? Forbearance also gives you a temporary break from making payments on your loans, usually because of a hardship. The biggest difference from deferment is that the loan holder still has to pay the interest that’s building up while they aren’t making payments toward the principal. That can add up quickly. There are two types of forbearance: general and mandatory. With general forbearance, the loan holder decides whether to grant you forbearance. Some ways to qualify include: Financial trouble Medical bills Loss or change of a job Anything your loan provider deems acceptable (Yes, it’s that subjective.) Your loan holder is required to grant you mandatory forbearance if you meet the requirements. Some of the qualifications include: Being in a medical or dental residency or internship Your total loan payment is 20 percent or more of your gross monthly income You work for the Department of Defense or Americorp and meet specified requirements. Reminder from Reineke: You should see deferment and forbearance as options of last resort. The best way to avoid landing in this position? “If you’ve got a bunch of loans, I recommend living like a resident.” TL;DR Forbearance and deferment will give you temporary breaks from paying your student loans. With forbearance, you still need to pay accumulating interest while not paying toward the principal. This isn’t the case with deferment. Source
