Student Loan Deferment vs. Forbearance (And How They Affect Your Credit)

Managing the weight of student loans is a huge burden thousands of recent college graduates have to shoulder and it can seem especially difficult when you are new to the workforce.

To top it all off, you may also run into financial hardships that causes it to become difficult -- even impossible -- to successfully make your loan payments on time.

Even if you have found yourself in a situation where your financial situation causes undue stress and damage to your credit, you can improve your situation.

What Are Deferment And Forbearance?

If you are struggling with making your student loan payments on time, deferment and forbearance can offer you temporary relief by allowing you to stop or reduce your payments for a short period of time under the right circumstances, such as returning to school, economic hardship, or unemployment.

What Is The Difference Between Deferment And Forbearance?

With deferment, you may not be responsible for the accrued interest on certain types of loans during the deferred period, but during a forbearance you are still liable for any interest that accrues on all types of federal student loans (with the exception of subsidized loans or Perkins loans).

Forbearance is usually for those facing financial hardship while deferment is generally for borrowers who are:

• In school (at least part-time)
• Serving in the military
• Serving in the Peace Corps
• Unemployed for up to three years
• Receiving state or federal assistance
• Earning a monthly income less than 150% of your state's poverty line
• In the process of qualifying for Perkins loan cancellation

Is Deferment Or Forbearance The Best Route For Me?

Once the deferment period is over and you are responsible for paying your interest, you have the option of either paying it as it accrues or allow it be added to your loan principal balance at the end of the deferment or forbearance period.

Keep in mind that if you allow your loan interest to be capitalized rather than just paying the accrued interest, the total payment amount will be much higher. You should also take into account that because interest increases so much, stopping your payments temporarily is not a great solution if your financial situation doesn't change.

If you know that your difficulty in repaying your loans is temporary, deferment or forbearance may be a good short-term solution.

However, if your situation is an ongoing circumstance that you believe may continue for a while, you might want to explore a different option, such as loan forgiveness or an income-driven repayment plan that lets you to make repayments based on your family size and income.

Do Deferment Or Forbearance Affect My Credit?

Yes -- once you defer, your student loan utilization will go over 100%, resulting in balances that are over the original account limit and damaging your credit.

After the deferment or forbearance period is over, many borrowers find it difficult to get the loan amount back under 100% utilization.

How Can I Improve My Credit?

When your credit utilization is over 100%, one solution to counteract it by raising your credit limit. Opening new lines of credit increases your credit amount and lowers your credit utilization, which in turn improves your credit score.

(To learn more about your credit scores, read our comprehensive guide.)

Your best line of action is the open credit cards with low limits and balances to create positive items on your credit report.

For example, if you have 5 accounts:

Student loan limit: $100,000.00 Balance: $104,568.00 Value: 104% Credit Card 1 Limit: $300 Balance: $50 Value: 16% Credit Card 2 Limit: $200 Balance: $50 Value: 25%

Regardless of the vast difference in actual dollars, your credit report reads this as three separate accounts with three different usage ratios.

The benefit of using this method is that credit cards with low limits are easy to qualify for and they are all separate new accounts, which can neutralize the impact of a large student loan.

The Bottom Line

You don't have to let student loans weigh down your credit and your finances. Credit repair and student loan refinancing services can help you improve your finances in the future.

What are some other way I can improve my credit and manage the weight of my student loans?

In case you're on the fence about taking out a credit card to lower your utilization, there are other alternatives to improve your credit and financial situation:

• Credit repair. If you've looked through your credit reports (which you can acquire at www.annualcreditreport.com) and you've found some discrepancies and inaccurate items, you may want to consider credit repair. You can do this on your own or hire a reputable credit repair service.
• Take out a credit builder loan. These loans allow you to make monthly payments on a secured savings account to help you build credit. Once the loan is completely paid off, the funds are released to you.
• Consider student loan refinancing. Refinancing your loans can help you reduce your debt and save money by replacing your student loans with new terms (like a lower interest rate and term length) and releasing any cosigners. For more information on student loan refinancing, read our comprehensive guide.

About The Author

Ashley Davison

Director of Operations, Credit Saint LLC

Ashley is currently the Chief Operating Officer for Credit Saint, previously working as a Logistics Coordinator at Ernst & Young. She is currently working toward an Executive Leadership Certificate from Cornell University.

With a degree in education, she is eager to teach the world everything she knows and learn everything that she doesn’t already know! Ashley is a FICO® certified professional, a Board Certified Credit Consultant, Certified Credit Score Consultant with the Credit Consultants Association of America and holds a Fair Credit Reporting Act (FCRA) Compliance Certificate.

Articles by Ashley Davison

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