Financial Coaching: Deferment vs. Forbearance

With all the hectic changes brought on by COVID-19, finances are certainly up in the air for many Americans. LHOME has been getting your calls, emails, and DMs. We'd like to offer support through our blog. While we don't claim to be experts on your personal portfolio, we can offer some information that can help set your mind at ease. It's clear that we'll need to adjust in the world of lending, but what is the best way to deal with this worldwide crisis?


One thing's for sure--we'll need to know the difference between two types of loan payment pauses: deferment and forbearance.


NerdWallet has an excellent article about the differences. Neither will negatively impact your credit, but not every borrower will qualify for both. most of us are relatively familiar with deferment. If you have a student loan, principal payment tends to be deferred (delayed) until graduation. The student federal aid site notes that technically, interest could still accrue on both deferment and forbearance.


With forbearance, you won’t have to make a payment, or you can temporarily make a smaller payment. However, you probably won’t be making any progress toward forgiveness or paying back your loan. As an alternative, consider income-driven repayment.


Deferment is just a suspension of regular loan repayment. Deferment terms are different depending on what sort of loan or payment plan you have.


You also might want to consider programs that offer debt forgiveness. According to the IRS, you may have to include the value of that debt forgiveness on your taxes.


One of my favorite finance celebrities is Suze Orman. When it comes to student loan debt specifically, she has some great guidelines for managing debt. Some highlights include paying off high interest loans first, using community college as a stepping stone to low DTI, and avoiding foreclosure.


When considering loan debt, be sure speak with a financial adviser. Many credit unions offer free financial coaching for their members. Some banks also have financial literacy classes that are open to the public. Being well-informed can save you thousands of dollars. And that is money you can use to help secure your family's financial future.


Do you have or need a loan? Worried about the current COVID-19 crisis and how it might impact your finances? LHOME is open by appointment only while we monitor the governor's health guidelines.


Special thanks to Joshua Watkins for inspiring this series!


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