With the average student loan debt for 2017 graduates creeping up to $28,650 and the total student debt hitting $1.52 million and climbing, those big payments are budget busters for Millennials and Gen Xers alike. One option to delay paying your student loans debt is to take out a deferment. But how does deferring student loans affect credit?
The short answer is that it doesn’t. But there are still some things to be aware of when it comes to deferments, forbearances and your credit score.
What Is a Deferment?
A deferred student loan is a student loan that you put off making the payments on until a later time. Student loans are usually deferred while you’re still in school or if you go back to school at least part-time. Deferment can also be an option if you’re facing a financial problem, such as unemployment or significant debt, that makes it difficult to make your payments. These are typically handled by a loan servicer.
What Happens If You Defer Your Student Loans?
When you defer your student loans, you won’t have to make payments for as long as the deferment lasts. However, depending on the situation and the type of loan, the loan could be accruing interest while in deferment. This can increase the total loan amount substantially depending on the length of the deferment. Some loans—such as subsidized loans from the government—are eligible for interest-free deferments, which is the ideal situation for a deferment.
How Long Can You Defer Student Loans?
If you’re deferring because you are in school, the deferment can go on as long as you are enrolled at least part-time. However, a deferment because of financial hardship can only last up to three years. There are also some private loans that offer student loan deferment.
How Does Deferring Student Loans Affect Credit?
Deferring your student loans won’t affect your credit directly at all. A deferment will be listed in your credit report, but it’s not a negative or a positive thing when it comes to your credit score.
However, if your deferment is because of financial issues and you’ve already been late or missed some payments, those can affect your score negatively. This is why it’s important to apply for the deferment before the situation gets bad enough to not be able to make the payment.
What Is a Forbearance?
A forbearance is another way to be able to halt your student loan payments temporarily for up to a full year. Discretionary forbearances are just that—at the discretion of your lender—but mandatory forbearances must be granted by the lender if certain circumstances are met.
An example of criteria for a mandatory forbearance is if your student payment is more than 20% of your gross monthly income. So, if you make $3,000 gross per month and your payment is $660 a month, you would qualify for a mandatory forbearance from your lender.
How Does a Forbearance Affect Your Credit?
Getting a forbearance on your student loan won’t affect your credit score. It will show on your credit report that the student loan has been put in forbearance, but it doesn’t affect anything negatively. As long as you made your payments on time until the forbearance took effect and you start making payments again when the forbearance is over, your payments will be marked as current on your credit report.
Deferment vs. Forbearance
When it comes to choosing between deferment or forbearance, the big differences come down to the length of time and interest. A deferment can be taken out for a longer period than a forbearance, which can be helpful if you think it’s going to be longer than a year before you can start making regular payments again.
It’s also possible to end up not accruing interest during a deferment for the following types of loans.
- Direct subsidized loans
- Subsidized Federal Stafford loans
- Federal Perkins loans
- The subsidized part of direct consolidation loans
- The subsidized part of FFEL consolidation loans
Loans in forbearance will collect interest the entire time no matter the loan type.
Which is Better—Deferment or Forbearance?
If you have loans that are eligible not to accrue interest during a deferment, the deferment is always the better option because it can save you quite a bit in added interest. However, a forbearance may be easier to qualify for, especially if you can meet the requirements for a mandatory forbearance.
If you’re wondering if a deferment affects your credit score or credit history, the answer is no. As long as you make all your payments on time before and after the deferment, it won’t affect your credit at all. Getting a deferment or forbearance can be a smart way to manage finances at times when your budget is just a little too tight. It can save you from resorting to making payments late or not at all and ruining your credit.