What is Student Loan Forbearance?
Student loan forbearance allows you to pause your student loan payments during a period of time that you can’t pay them. If you haven’t made several payments, which would mean you’re delinquent, forbearance can prevent you from going into default. The catch is that it can leave you in a worse financial situation than before you went into forbearance because interest continues to pile up.
During a forbearance, you are responsible for paying the interest that accrues on your federal loans. This is the main difference from a deferment, which would not hold you responsible for paying the interest.
Using forbearance can mean the loss of borrower benefits like repayment incentives that lower your interest rate. It may also delay your eligibility for cosigner release on private loans. There’s a lot to learn before you apply for forbearance, so read on to find out what you need to know.
The 2 Types of Forbearance Requests for Federal Loans
Mandatory Forbearance for Federal Student Loans
If you don’t qualify for federal student loan deferment, then you may get a “mandatory forbearance.” If you meet the eligibility requirements for a mandatory forbearance, then your loan servicer is required to grant it to you. You may be eligible for mandatory forbearance if you’re:
- Serving in a medical or dental internship or residency program and meet the requirements
- The total amount you owe is 20 percent or more of your total gross monthly income, for up to three years
- You’re serving in an AmeriCorps position for which you received a national service award
- You qualify for teacher loan forgiveness
- You qualify for partial repayment of your loans under the U.S. Department of Defence Student Loan Repayment Program
- You’re a member of the National Guard and have been activated by a governor, but don’t qualify for a military deferment
Mandatory student loan forbearances can be granted for up to 12 months at a time. If you are still eligible when the 12 months expire, then you can request another mandatory forbearance.
Discretionary Forbearance for Federal Student Loans
If you don’t meet the qualifications above, then you can request a “discretionary forbearance,” which is sometimes called a general forbearance. Your servicer will determine whether or not to grant it. You can request a general forbearance if you’re unable to make payments for the following reasons:
- Financial difficulties
- Medical expenses
- Change in employment
- Other reasons acceptable to your loan servicer
General forbearances are available for Direct Loans, FFEL Program loans, and Perkins Loans. Loans that are made under all three programs may not be eligible for a forbearance of more than 12 months at a time. If your forbearance expires and you’re still under financial hardship, then you can request another one.
Perkins Loans are only allowed to undergo forbearance for three years. FFEL Program loans and Direct Loans have no fixed cumulative limit on general forbearance, but your servicer may set a maximum time limit. For more information, review the General Forbearance Request.
Private Student Loan Forbearance
Private lenders typically have forbearance policies that are offered in 3-month increments for up to 12 or 24 months. Each company will have a different policy and forbearance offerings.
Some lenders may charge a monthly fee for each loan in forbearance on top of the interest that accrues. Military deferment is a common type of forbearance, which can last up to 3 years, and borrowers who are affected by natural disasters are sometimes given forbearance.
You can call your loan servicer and explain the situation and try to figure out a plan. The forbearance options may not be listed on their website, but you may get an answer by speaking to someone on the phone. Ask about paying interest only or getting an interest rate reduction for your estimate period of hardship.
How to Forbear Your Student Loans
For federal loans, you will need to complete the general forbearance request and submit it. On the form, you’ll have the option to temporarily stop making payments, temporarily make smaller payments, and set your preferred start and end dates for the forbearance.
For private loans, you will need to contact your loan servicer and give them the information they need. If you are unable to obtain a forbearance, you might be able to change your repayment plan.
Am I Eligible for Student Loan Forbearance?
The reasons typically accepted for forbearance include financial difficulties, medical expenses, and changes to employment that would affect your ability to make your loan payments. Forbearance is granted at your lender’s discretion.
If you have personal problems or are unemployed, your loan servicer may move you forward with a forbearance. Mandatory forbearance, which is also known as the excessive debt forbearance, must be given to people who can prove that their student loans are greater than 20 percent of their total monthly gross income.
What Happens to Loans During Forbearance?
The U.S. Government does not pay for interest during the forbearance period. That means all the interest will capitalize and be added onto the balance of your loan during the forbearance period.
The interest can accrue quickly and leave you with a big surprise at the end of the forbearance period. While it solves one problem, it causes another. The only way to prevent the interest from accruing is to pay it while in forbearance, which doesn’t solve the issue you had of not being able to pay in the first place!
What Types of Loans Accrue Interest During Forbearance
You can choose to pay the interest as it accrues or allow it to accrue and be capitalized, which means it is added to your principal loan balance at the end of the forbearance period. Capitalization means the total amount you pay over the life of your loan increases. Unpaid interest is capitalized on Direct Loans and FFEL Program Loans, but never on Perkins Loans.
Capitalized interest increases your principal balance and takes many people by surprise after they review their balance after making payments for many years. It compounds, which means that when your student loan balance grows, then the interest is calculated on your new loan balance.
Many borrowers are surprised at how massive their debt has grown after a forbearance and capitalized interest is usually to blame. You’re paying interest on the interest of your loan, which you want to avoid by all means possible.
Find Out if Forbearance is Right for You
There are a few questions you should ask yourself before applying for forbearance:
Is my financial hardship temporary or permanent?
Getting fired or being laid off can mess with your budget in several ways. These are unexpected turns of events that may improve in the short-term. Forbearance can help you get through the tough time.
If you applied for your dream job and it pays a lot less than you thought it would, then forbearance isn’t the right solution for you, because your financial situation isn’t going to improve in the short-term. You should check out other repayment options like income-based repayment or graduated repayment.
Could I apply for a deferment first?
Deferment is similar to a forbearance except you don’t have to pay interest during the deferment period for subsidized Stafford loans. Interest on your unsubsidized loans will accrue and be capitalized just the same as with forbearance.
You’ll need to meet the requirements for deferment such as unemployment, extreme economic hardship, and others, but you can’t be denied it if you qualify.
Do I need to postpone my payments or could I change my budget instead?
Forbearance may seem like a quick fix to stop your student loan payments, but you may be better off taking a closer look at your budget to see if you can cut back on expenses and dedicate more money to paying off your student loans instead. See if you can lower your payments with a different repayment schedule and cut out any unnecessary expenses, too. Paying off your student debt faster will save you money in the long run.
Alternatives to Forbearance
One option is to cut payments to a portion of your income for federal student loans. Although paying less per month will also cause interest to grow, income-driven repayment also means you’re eligible for forgiveness after 20 or 25 years of repayment.
Income-Based Repayment (IBR) is the most widely available and widely used income-driven repayment program for borrowers of federal student loans. IBR helps keep monthly loan payments affordable according to each individual borrower’s monthly income using a sliding scale model. Enrolling in an IBR would also provide you with interest forgiveness on the first three years of the subsidized portion of your loans that you are not responsible to pay.
The other benefit? If you start earning more money and can pay more, then you can make additional payments on your loans each month in order to pay them off earlier. Choosing income-driven repayment also keeps your loans in good standing, and you could pay $0 a month depending on your discretionary income.
Revised Pay As You Earn (REPAYE)
Revised Pay As You Earn was created as an extension of the current PAYE program by the Department of Education. REPAYE was designed to remove some of the restrictions imposed by previous income-driven repayment plans while adding some additional benefits. With REPAYE, you monthly payment is capped at 10% of your discretionary income and you can be eligible for loan forgiveness after 20 years of payments for undergraduate loans, and 25 years for graduate loans.
REPAYE also features the most generous interest forgiveness of all the student loan repayment plans.
Student Loan Refinancing
If you need a long-term solution to making your private student loan payments more affordable, then you should call your lender and see if they’ll work with you to reduce your interest by signing up for auto payments.
If that doesn’t help, then your private student loans may be better served by being refinanced. Take a careful look at the interest rates that are offered by different refinancing lenders, because you want a lower interest rate and a lower monthly payment. Avoid extending the term of your loan for much longer than you’re comfortable paying, because that means you’ll end up paying more overall.
If your interest rates have been creeping up ever since you left school, then refinancing still might be a good choice. The lower interest rate can help you to make higher payments toward the principal, which means you’ll be able to pay the total amount down faster.
Does Forbearance Affect Credit?
You will only see a negative mark on your credit report if you miss a student loan payment. While your loans are in forbearance, they will appear “current” on your report. It’s important to continue paying your loans as required until your student loan servicer confirms your request for deferment or forbearance has been accepted.
The Bottom Line on Forbearance
Student loan forbearance is good when you’re in a tough spot and know you’ll be out of it soon. It can save you from delinquency and default on your loans, but you should only use it for emergencies and see if you’re eligible for any other plans first.