This article is intended to show you the truth behind deferment and forbearance and why you never ever want to use them when it comes to your student loans. They call these two things loan benefits but I can assure you they are no benefit to you at all, only your lender. First let’s briefly discuss what they are and the difference between them and then we can go from there.
A deferment or forbearance is a loan “benefit” that allows you to temporarily postpone making your federal student loan payments. They are usually given in 6 month to 1 year increments. Theoretically you are pausing or suspending your loan payments, but that is where it becomes misleading because nothing is actually on pause at all. Your loan is actually growing.
Deferment and forbearance are basically the same exact thing; the only difference being is that on one particular loan they are different. Subsidized loans are loans that the government pays the interest for you when you are in deferment. Now subsidized loans as you can imagine are given out in a very limited supply. I don’t mean that not everyone can get them what I mean is that in comparison to unsubsidized loans the Department of Education (DOE) only gives out about 30% subsidized vs. unsubsidized for obvious reasons. So an independent first year grad student that is applying for $9,500, which is the max in fed loans, for his first year will get only $3,500 in subsidized loans. That is the only difference, besides that one little thing they are exactly the same.
Now here is why they are not benefits to you at all because of a banking term called Capitalization. Capitalization is the addition of unpaid interest, while in deferment or on forbearance, to the principal balance of a loan. This will increase the principal and total cost of the loan. In layman’s terms what the lender is actually doing is collecting interest on your loan month after month and then taking that interest and adding on top of the loan. That’s right! Expect to see your principle balance much bigger after you get off these “benefits.” So now when you start up paying your loan again your principle is higher and your interest you are paying on that principle is higher as well, not the actual percentage rate, but the amount of interest because it is now a percentage of a higher loan balance.
INTEREST NEVER STOPS, IT NEVER SLEEPS, AND YOU NEVER PUT IT ON PAUSE OR SUSPEND IT!!! Do you really think the student loan lenders are going to just let you stop making payments without getting something for it in return? Of course not, every time you defer they make more money and put you further in debt. That is why they don’t mind, sometimes they even suggest, you take a deferment or forbearance when you hit a financial hardship because they know they are just going to roll up your debt. Instead of giving you an actual solution they gave you more of the problem and of course they made more money doing it. This is the kind of bullshit that a lender can get away with when you give a loan to an unsuspecting young adult who knows nothing about the system they are in and how much that system is stacked against them.
Let me get off my high horse and show you a real world example and comparison. Let’s say you got out of school about 5 years ago and every month you have been paying your Standard loan payment on time. You go on either one of these scams for a year because you have hit a financial hardship or whatever the reason why. You come back off of your deferment or forbearance and start up paying your loan again. With the amount you now owe it is like you have been only paying for two years.
Another example would be if you understand how mortgages work. Imagine your student loan as a mortgage, in the same way when you pay on your mortgage for the first 7 years or so you are only paying interest, the principle doesn’t move that much if at all. With a federal student loan it is much the same so if you go on deferment or forbearance for any reason it just damages the effort you have already put in.
This is why you hear the horror stories of people paying on their student loans for the last 10 – 20 years and their balance is now higher than when they left school. These “benefits” are exactly how that happens:
The real solution to any financial hardship is Income Driven Repayment. In my opinion 95% of everyone with a federal student loan should be in one of these programs. There is only a limited few that it doesn’t make sense for, depending on their income, career, family size, tax structure etc. If you would like to learn from an expert on student loan repayment please come to CollegeLoanFreedom.com. Again there is no magic bullet for student loans however the more you know about income driven repayment and how to use it, you will feel like a magician. When you are in one of these five income driven repayment plans and you encounter any kind of financial hardship, be it job loss, hours cut, wage reduction, illness, death in family, divorce, baby on the way or whatever the case may be, as soon as that happens you can call the servicer that same day and they will drop your payment amount to compensate for the loss. That is what income driven repayment is all about, it takes into account how much your household income truly is so that you can afford your payment. And the best part is even if your payment is $0.00 those payments count toward forgiveness so that this rat race will stop one day instead of keep going like with the “benefits.” Read my article “The Difference Between Normal Loans and Student Loans” for more info on how to beat the game.
Lastly I just want to touch on Mandatory Deferment; oh you are going to love this one too. When you are in school or decide to go back to school all your loans get put into deferment automatically and there is nothing anyone can do about it, not even me, the expert. That is how the law is written. They say it is so “you don’t have to worry while you’re in school, that you should just be focused on learning, not worrying about your loan payments” but we know better don’t we. They are making your debt bigger. Oh and let’s not forget the first six months when you graduate your loans are put into automatic deferment as well. This deferment is so you can “find a job in the field you studied” and have a short window of time where you “don’t have to worry about your student loan payments in order to get that job.” Yeah right, it is so they can grow your loan for a little while and disguise it as them helping you out when in reality they are making more money off of you. This deferment though you don’t have to take. I can help you with all of that, if you understand income driven repayment, forgiveness, and the student loan game you are in or want to learn more please reach out to me at Morrison@CollegeLoanFeedom.com or just come to CollegeLoanFreedom.com. But either way you can call and get the 6 month deferment waived so you can start the clock on getting your loans forgiven immediately and not let those damn things grow any bigger.
My name is Larry Morrison the founder of College Loan Freedom and I truly believe that your education should make your life better not harder. I am here to make sure of that
Student Loan Expert