After months of studying the federal student loan program, I built a free spreadsheet that over 1,500 people have used to avoid losing out on thousands of dollars in savings by refinancing or using the PSLF program.
Clearly, helping people with student loan debt is a passion of mine. Let me share with you another free bit of advice. Student loan forbearance is one of the worst things you can do when making a repayment plan.
What is Forbearance?
If you ever run into a rough patch financially, one of the first things you might do is apply to your loan servicer to put off your monthly student loan payments. This is basically what forbearance is. It sounds a lot like forgiveness, except you’re basically just kicking the can down the road. When you enter into forbearance, the idea is that you’ll eventually make payments again when you can afford to.
Why is Forbearance Such a Big Problem?
Here’s the deal. If you’re using the Public Service Loan Forgiveness program, you need to get to 120 qualified monthly payments as soon as possible. Once you make it there, all your debt gets forgiven tax-free.
Imagine a brand new medical school grad Sarah who is struggling to make the monthly payments with REPAYE or IBR. She plans on a five year residency followed by a three year fellowship. Her total debt load is $300,000, and her standard monthly payment would be about $3,500.
Sarah moves to NYC for residency after medical school. Rent is super expensive, so she signs up for a $1,500 a month apartment with roommates. With all her expenses, it’s really tough for her to make her income based payment, even if it is only $500 a month. For the first few months, she decides to do forbearance so she can get her feet underneath her financially.
Assume Sarah limits forbearance during the entire loan repayment to only 6 months. What she does is add 6 payments to the end of the loan repayment period until she’ll qualify for PSLF forgiveness. As a resident, that costs her $500 a month times 6 for a total of $3,000. As a full fledged surgeon, at minimum she has to pay $3,500 times 6 for a total of $21,000.
In other words, Sarah could have saved $18,000 by not entering into forbearance.
Prioritize On Time Student Loan Payments in Your Budget
Anyone going for forgiveness under the federal student loan program REALLY needs to NEVER enter forbearance. All you’ll do is add more money to your total bill.
After all, the income based repayment plans allow you to adjust your payments so that they’re affordable even if you lose your job. If you are a veterinarian, doctor, non-profit leader, or other occupation that I view is highly likely to participate in loan forgiveness, please make sure to pay your student loans.
If you ever have questions, I can respond to basic ones at help@studentloanplanner.com. If you’d like me to help you evaluate your student loan repayment strategies, contact me today for a consultation. I have helped most of my clients avoid losing out on tens of thousands of dollars. Feel free to reach out via the contact for below as well.
If you never read another one of my student loan articles, just please never enter forbearance. You’re just burning thousands of dollars in cash by doing it.
Questions for You
- Have you ever used forbearance? What was the experience like and would you recommend against it?
- Are there any good reasons you can think of to use forbearance? I’d love to hear them
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GOOD REASON: As a teacher at a title one school, I am the exception to your advice. I SAVED money by doing forbearance. I paid a lump sum for less than half of what I would of had to pay if I were to have continued monthly payments. Come on June 1, 2017 and this loan can go away!
I applied for forbearance after paying on my loan for a year. I mathed out how much I had to pay to get my total balance to be what I would have forgiven and paid the lump sum and am now just waiting until my 5 years are complete. Conveniently enough one month before I get married 🙂
Casey I’d like more info on this case. Can you detail how you were able to save money doing forbearance? Compared to plans like REPAYE that limit payments to 10% of discretionary income and limit interest growth, I don’t see how the savings you mention are possible.