Table of Contents
Overview
General Forbearance
Mandatory Forbearance
Private Loan Forbearance
Pros and Pros and
Alternatives
The Bottom Line
Loans Student Loans
In the case of student loan forgiveness: Pros and Pros and
It’s a temporary, but not long-term solution for those whose finances are tight
By Jim Probasco
Updated November 29, 2022
Read by Ebony Howard
Fact checked by Suzanne Kvilhaug
Student loan forbearance is a method to reduce or suspend your student loan payment for a period of time, typically for a period of 12 months or less, in periods of financial stress. Forbearance isn’t as appealing as deferment, in which you might not be required to pay the interest accruing during the deferment time period for specific types of loans.1 With forbearance, you are always responsible for accrued interest when the period of forbearance is over.2
Note that all federal student loan payments and collections have been suspended. The date for expiration for this relief came initially Dec. 31, 2022–and the interest rate set at 0 0.5% due to the financial impact of the economy crisis.34 The Department of Education has again extended the suspension of Federal student loan payments, this time in response to a federal court ruling stopping the White House’s student loan forgiveness program. Students loan payments are paused until the earlier of the two dates:
60 days following the time that the department is permitted to implement the forgiveness program or the lawsuit is resolved or
60 days after June 30, 2023.
But, during times when loans are being taken out there are pros and cons to pausing your payments. This article will discuss the advantages and disadvantages are.
Key Takeaways
Federal student loan collection and payments are being halted by President Biden, for now through 60 days following the 30th of June, 2023 (or 60 days after pending litigation against the forgiveness program is completed, whichever occurs earlier).
In times when loans are being paid There are arguments in favor and against why you might be tempted to suspend your payments.
Forbearance can be used for short-term (typically twelve months) alleviation only. The program is not intended to be a solution for the long term.
Deferment or an income-driven repayment (IDR) plan is preferable over forbearance.
Forbearance for federal student loans can be obtained in two forms: general and mandatory.
You are required to continue making repayments on student loans until your forbearance application has been approved in order to keep from default.
To lower costs, ensure that you pay interest when it accrues while your loan is in forbearance..
Student Loan Forbearance: An Overview
For all student loan forgiveness, the charges on the loan continues to accrue during the deferral period and is usually capitalized (added to the loan amount due) at the end of the deferral time period unless you pay the interest as it accrues.2
Perkins loans are an exception to the capitalization rule. When you take out the Perkins loan, your interest is accrued during the deferral time but is not capitalized. Instead it is added to the balance of the interest (not that of the principal) during repayment unless you pay it off as it accumulates. (Although there was a halt to the state providing Perkins loans in the year 2017, many people are still repaying what they borrowed through these loans. )56
Federal student loan forbearance is usually granted for 12 months at a stretch and is able to be renewed for up to three years. The conditions and the amount of payments for certain types that are federally funded loan forbearance are governed by law. In other situations, the loan servicer has discretion.2
The private student loan forbearance is usually granted for up to 12 months, however lenders are not often able to provide renewal. Conditions and amounts for private loan forbearance are up to the lender.
If you’re in the process of defaulting on your student loans You are not in a position to benefit from any of the strategies described in this article.7
General Federal Student Loan Forbearance
If you’re having difficulty paying your direct or FFEL loans and aren’t eligible for deferment, you can ask for a general forbearance for up to 12 months from your loan servicer.2
If your financial problems continue, you can request a new general forbearance of up to 12 months and another 12 months following that, for a total of three years. The loan servicer, however, can set a maximum time per person for both direct and FFEL loans.2
General forbearance is granted at an individual discretion by the loan servicer, and is usually granted to cover unexpected medical bills, unemployment, or any other financial issue that prevents you from making loan payments. You may request an general forbearance through filling out the online form or by making a call to your loan servicer and asking for an exemption over the phone.2
Mandatory Federal Student Loan Forbearance
Unlike a general forbearance, which is at the discretion of your loan provider, you have to receive a compulsory forbearance when you meet the criteria and request it. Most mandatory forbearance uses this same format, called Mandatory Forbearance Request: SERV There is a distinct form for Teacher Loan Forgiveness and AmeriCorps.
Participation in a dental or medical residency or internship (direct as well as FFEL loans only)
Student loan payments at least 20% of your gross monthly income (direct, FFEL, and Perkins loans)
Service provided by AmeriCorps (direct as well as FFEL loans just)
Requirements for Teacher Loan Forgiveness (direct or FFEL loans only)
Qualification for partial repayment of student loans through the U.S. Department of Defense Student Loan Repayment Program (direct and FFEL loans only)
Activated service in the National Guard when it doesn’t provide for a military deferment (direct or FFEL loans only)2
Private Student Loan Forbearance
Your forbearance options for private student loans will vary by lender, but they are generally more limited than those offered for federal loans.
Many private lenders extend a forbearance option while you are in college or completing medical residency or an internship. Some let you make interest-only payments while at the school. Forbearance in school typically comes with a time limit, which could create issues if you wait for more than four years before you graduate. Some lenders offer a six-month grace period following the completion of your degree.
Some private lenders grant forbearance in the event that you are not employed or are having difficulty making payments after you graduate. The majority of times, they grant forbearance to you for a period of two months at a stretch for less than 12 months in total. There could be an additional fee for each month that you are in forbearance.
Other forms of forbearance are usually offered to active-duty military members or if you have been impacted by the effects of a natural disaster. In all private loans the interest is accrued during the period of forbearance, and it is capitalized until you pay it off as it is accrued.
Pros and Pros and
As with many financial instruments, student loan forbearance has both advantages and drawbacks. If you’re faced with the choice between forbearance and wage garnishment or loss of an income tax refund as an example, forbearance may be an option that is more beneficial both in terms of financial cost and of the impact it will have on your credit.8
It is important to note that the the interest you pay during deferment is likely to be less costly than the interest you’d pay if you took out an individual loan or, worse still the payday loan. However, the fact that the interest is capitalized will mean you have to pay more over the course that of the loan than have if you could not be able to forbear.
Pros
Better than default or garnishment
Lower interest than payday or personal loan
Helps you pay crucial costs
Has no impact on your credit score
Cons
Not a long-term solution
Capitalization of accrued interest is expensive
Repetition of renewals could lead to loan default
Late/missing payments hurt your credit score
The option of forbearance is a temporary way to help you pay for the essential costs, such as housing and utilities however, it could be costly If you decide to utilize it as a long-term solution by continuously renewing your status. This could ultimately result in loan default or worse and the risk of serious damage to your credit score.
Although forbearance appears on your credit report, it does not result in a lower credit score unless you’ve made failed or made late payments.8 To avoid any complications or unnecessary expenses during and following forbearance, keep making payments while your application is being completed, and then get out of forbearance as soon as you are financially capable of it, and, if it is possible, make interest payments in the time they accrue.
The American Rescue Plan passed by Congress and approved by President Biden in March 2021 has the provision that student loan forgiveness granted between January. 1st, 2021 and December. 31st, 2025 will not be tax-deductible for the recipient.9
Alternatives to Forbearance
Before submitting an application for forbearance and based on the kind of loan(s) you have you must look at two options: deferment and income-driven repayment (IDR) options.
Deferment, like forbearance, lets you pause payments temporarily–typically up to three years. If you’re eligible for deferment and you have Federally subsidized loans the interest accrued during time of deferral is paid to the federal government. All you will owe at the end of deferment is the original loan amount.1
Federal loan deferment and private loan delay are treated the same way as forbearance. That means that interest accrues and gets accrued at the conclusion of the deferral period increasing the amount you owe.1
IDR Plans for federal student loans come in four types: revised Pay As You Earn Repayment (REPAYE) Plan, Pay As You Earn Repayment (PAYE) Plan, income-based Repayment (IBR) Plan and the an Income-Contingent Repayment (ICR) Plan.10
They are typically made up of your income that you can afford and can be as low as $0 per month. One disadvantage is that because the repayment process is generally longer, you will be paying more interest over the course that of the loan. One possible benefit is that if you loan is not totally repaid by the end of the repayment period–20 to 25 years–any balance will be forgiven. Visit the Federal Student Aid to learn more about the program and submit the online application for an income driven repayment (IDR) plan.10
The Bottom Line
Student loan forgiveness is typically an option last resort, and not a primary option. You can use it when you need temporary relief and don’t qualify for deferment. If you have problems that last a long time, think about the income driven repayment (IDR) option instead. If possible, pay the interest as it accrues to avoid paying fees on the amount of interest you pay when you resume repayment. If you do begin to experience financial trouble, talk to your loan servicer to discuss all repayment options.
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