Legally Thrifty: Postponing Federal Loan Repayment – Deferment v. Forbearance
Photo Credit: www.mybudget360.com
Last month, the Wall Street Journal reported that only 55% of 2011 law graduates had secured full-time, long-term jobs that required a law degree (see here for full article). This statistic is incredibly bleak, in my opinion, compared to the employment and unemployment rates for other industries. What is the other 45% doing? My guess is that these attorneys-to-be are probably working at Starbucks, settling for part-time legal gigs, performing contract work, or at the very worst, unemployed.
Whether you’ve recently finished law school or you’ve been a victim of the recession job cuts, you may be having trouble making payments on your student loans due to the current state of the legal market. If you can’t pay even the minimal interest on your loans, then you should consider the options of deferment or forbearance in lieu of default. Student loans are not dischargeable by bankruptcy and default should be avoided at all costs! I will be discussing these non-payment options under Federal Direct Loans since they are the most common loans probably taken out by Ms. JD readers.
After graduation, you have a six month grace period during which you don’t have to repay your loans. Once this period ends, however, you must begin making payments. There are various repayment plans that will work with your income, which will come up in a later post of Legally Thrifty. If you have no income or make too little income to make regular payments of at least interest, then you need to defer or forbear your loan or else you will fall into default. You will not be eligible for deferment or forbearance once you’ve defaulted on your loan! So be a smart cookie and keep your loan in check.
Both deferment and forbearance are postponements of payment. So then what’s the difference between deferment and forbearance? The main difference is that interest continues to accrue under one option but not the other. Here is a basic rundown of deferment versus forbearance.
- Interest does not accrue on the subsidized portion of the loan. However, interest does accrue on the unsubsidized portion and if you don’t pay the interest as it accumulates, it will be capitalized and added to the principal. Since the principal balance becomes larger, the total amount that has to be repaid will end up being higher.
- Deferment is only available in certain situations and requires supporting documentation, including the following: Enrollment at least half time in an eligible post-secondary school, studying full time in a graduate fellowship program or rehabilitation program for the disabled, unemployment (up to 3 years), economic hardship (up to 3 years), or active duty in the U.S. Armed Forces or National Guard.
- Accrued interest becomes capitalized and added to the principal so the total amount that has to be repaid also ends up being more money in the long run. However, you may elect to pay interest during the period of forbearance to prevent growing principal.
- Forbearance is available for those who don’t qualify for a deferment or those who have maximized the amount of time allowed for a deferment.
- Granted in intervals of 12 months at a time for up to 3 years.
Overall, deferment is the more preferable option while forbearance is the last resort option. The most common reasons for deferment will be unemployment and economic hardship.
When I first graduated law school, I could only find part-time work and I wasn’t making enough income to make payments on my Stafford loan, even while living at home. So I explored the deferment possibilities and discovered that I could qualify for unemployment deferment. To qualify, you have to be diligently seeking but unable to find full-time employment in any field or at any salary, and if requesting an extension of unemployment deferment, you must have made at least 6 diligent attempts to find full-time employment within the last 6 months. Full-time employment is defined as working at least 30 hours per week in a position expected to last at least 3 months.
In other words, part time work counts as unemployment under the Federal Family Education Loan Program. Hallelujah if you’re a law graduate unable to find a full-time job! You can also qualify for unemployment deferment if you have just been let go and you’re eligible for unemployment benefits. Click here for the application form or apply online.
Economic hardship deferment is a harder nut to crack. To qualify, you must be able to prove that you fall into one of six categories, which you can find listed on the application form here for purposes of explanatory brevity. The criteria for the categories that use the Federal Minimum Wage Rate and the Poverty Line can be confusing.
My biggest peeve with the economic hardship conditions is that this deferment option doesn’t take into account the high cost of living expenses. Since I live and work in the New York City area, everything is infinitely more expensive and eats away most of your already low income. I found that my eventual full-time salary exceeded the Federal Minimum Wage Rate or Poverty Line calculations but still fell short of being able to make the minimum interest payments on my Stafford loan. Yes, I know that you can always move to rural America or camp out in suburbia. However, everyone’s situations are different and you may be living in a high cost of living area because that’s where your job is located or you need to be near your family.
Hopefully, you’re in the green and doing your best to regularly pay down your loans. If you’re still struggling to breathe and just find full-time employment, remember to look into deferment or forbearance. Times are tough but the tough keep going!