If you’re repaying student loans and run into a crisis, how can you find relief? Many borrowers turn to student loan forbearance. But what is loan forbearance, and when does it make sense to pursue? Is it available to all borrowers or just some?
Forbearance can be tough to navigate without understanding how it works. Here’s a closer look into student loan forbearance and options to avoid it.
What is student loan forbearance?
Student loan forbearance is an option that allows you to delay making monthly payments. Reasons someone would pursue forbearance include:
- Financial difficulties
- Medical expenses
- Change in employment
Loans in forbearance still accrue interest. At the end of the forbearance period, that interest is added to your principal. This is called capitalization. Essentially, you end up paying interest on your interest. Forbearance is meant to be a short-term solution when facing temporary hardship.
Mandatory vs. discretionary forbearance
There are two types of forbearance for federal loans: mandatory and discretionary. Mandatory forbearance is called that because your loan servicer must grant forbearance if you meet certain criteria. Some of the qualifying circumstances include:
- Monthly loan payment is more than 20% of your gross income
- Service in a medical or dental internship or residency program
- Member of the National Guard that has been activated by a governor
Discretionary forbearance, also referred to as general forbearance, can be requested for hardships such as medical or financial difficulties. Loan servicers have the option to approve or deny your request.
Direct Loans, loans through the Federal Family Education Loan (FFEL) Program, and Perkins Loans are eligible for discretionary forbearance. Approved loans for mandatory forbearance depend on the specific request type.
Mandatory and discretionary forbearance both have a limit of 12 months at a time. If you have Perkins Loans, your cumulative limit on general forbearance is three years. There’s no cumulative limit for Direct Loans and FFEL loans, but loan servicers can place a cap on the maximum time period you can receive forbearance.
Student loan forbearance for federal and private student loans
When people talk about loan forbearance, usually they’re referring to federal student loans. Private student loans may have forbearance options, but they aren’t as comprehensive as with federal loan programs.
Many private lenders don’t offer loan forbearance or have limited options for borrowers. Because they are private companies, they aren’t required to offer forbearance. But your private loan servicer may work with you if you run into a hardship.
Another option with private loans is refinancing, which ideally could lower both your interest rate and monthly payments. In some cases, you can also save money by taking advantage of refinancing cash bonuses.
Pros and cons of using student loan forbearance
Forbearance is an option to delay your student loan payments. If you have a legitimate hardship, having the option to pursue loan forbearance is huge. When you’re going through a medical or financial crisis, the last thing you want to worry about is your student loans. Being able to pause your payments allows you to focus your energy on your emergency or situation.
On the flip side, you’ll end up paying more for your student loan in the long run. Once you finish a forbearance period, your loan interest will capitalize, and your loan balance will be higher than when you first started forbearance. It’s a good idea, if possible, to at least make payments to cover the interest during this time. This will keep it from capitalizing.
Is student loan forbearance a good option?
Using student loan forbearance isn’t the best if you can avoid it, but it isn’t the worst option. Ultimately, if you’re in a scenario where you have to choose between forbearance or missing your payments, go for forbearance. You don’t want to default on your loans.
Another time it’s useful is if you're dealing with high credit card debt. Loan forbearance may be better than prolonging credit card debt because interest rates are much higher on credit cards. Pause your student loan payments and concentrate on knocking out your high-interest debt first.
One way to plan for unforeseen circumstances is to build up an emergency fund. It’s a good idea to plan for three to six months of expenses, generally.
3 alternatives to student loan forbearance
Forbearance is a temporary fix and should be avoided if possible. There are other options for borrowers. Explore the following options before turning to forbearance.
1. Income-driven repayment (IDR) plans
IDR plans can lower your monthly loan payments. There are four IDR plans available, but your best options are Pay As You Earn (PAYE) or Revised Pay As You Earn (REPAYE). With PAYE and REPAYE, your monthly payments will never be higher than 10% of your discretionary income.
After 20 to 25 years, any remaining balance will be forgiven. Be aware that you may face a hefty tax payment on the forgiven amount.
2. Other loan repayment plans
Additional repayment options include the Extended Repayment Plan and Graduated Repayment Plan. The Extended Repayment Plan prolongs your loan term up to 25 years. This will lower your monthly payments, but you’ll pay more over the life of your loan because of increased interest.
The Graduated Repayment Plan is like the Standard 10-year Repayment Plan. However, the difference is that your loan payments start low and increase every two years. The payment jump can be significant as you continue through the plan. If you aren’t sure your pay will increase over time, it’s probably better to choose a different repayment option.
Some borrowers can qualify for loan deferment. It’s similar to forbearance in that it delays payments. With deferment, though, you don’t accrue interest on certain types of loans. Contact your loan servicer to see if loan deferment is an option for you.
Loan repayment is an important financial decision to make. Let us help you make the smart choice for your specific situation.
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