How Much Your Student Debt Can Grow While in Forbearance
If you’re unable to make payments on your student loans, you might be considering some extreme options, like leaving the country, going underground, or building a time machine. But there are other, more practical options out there, such as forbearance. What is forbearance, you ask? It’s a federal program that can help postpone payments for qualified applicants.
Sounds like a perfect solution, right? Not so fast—it’s a little more complicated than that.
While you’ll temporarily be able to stop making payments, interest will continue to accumulate on your loan. This interest gets added to your balance when the loan switches out of forbearance and back to your payment plan.
While these programs can ease student loan stress if you’re in a temporary bind, they don’t make the debt go away. Forbearance programs might seem like a tempting option for your student loan debt, so here’s what you need to know.
When Is Student Loan Forbearance the Right Solution?
Student loan forbearance will allow you to temporarily stop making monthly payments or temporarily reduce the amount you pay. It might be an interim solution if you were to lose a job or run into an unexpected emergency.
Think of what would happen if you were to get extremely sick or get laid off. Or, what if you broke a few limbs on your latest freefall skydiving trip? Forbearance could give your finances breathing room while you get back on your feet, literally.
Forbearance can be a potential solution when you are experiencing financial hardship, but it does not solve your student loan debt burden.
For instance, putting your student loans in forbearance so you can use the funds to pay down another debt could potentially put you in trouble. This is a classic “robbing Peter to pay Paul” scenario, and it could make things more difficult in the long run.
You Can Stop Paying in Forbearance, but Not Forever
Forbearance programs can offer temporary relief by allowing borrowers to stop paying on their student loans without penalty. It’s important to note that it is up to your loan servicer on how long your student loan debt may be in forbearance.
If you choose to just stop paying your student loans, you risk defaulting on your loans. Having your student loan debt in default doesn’t mean that your loans go away. If your debt goes into default, you risk loan “acceleration,” which is when your entire balance comes due—immediately. You also risk your wages being garnished, and the default being reported to major credit bureaus, which means your credit score may take a hit .
Am I Eligible for Student Loan Debt Forbearance?
There are two types of forbearances for student loan debt. General forbearance, due to financial hardship, medical expenses, or change in employment, may be granted up to 12 months at a time. Mandatory forbearance may also be granted for up to 12 months, as long as you meet the requirements .
Your loan service provider will make the final call on your request for forbearance. You’ll probably want to take a look at your financial situation to determine if this solution is best for you and weigh your options realistically.
Mandatory forbearance applies to specific federal programs and economic hardships. If you are involved in certain medical or dental residency programs or internships, you could apply for this type of forbearance. National Guard activation, Americorps service, and certain teaching positions may also make you eligible for mandatory forbearance.
You’ll need to meet eligibility requirements and submit a request form to be considered. In the meantime, you must keep making payments to avoid delinquency.
Capitalized Interest Is a Capital Pain
When your student loan debt goes into forbearance, the interest accumulated during the forbearance period is treated as capitalized interest. Capitalized interest is interest that is added to the outstanding balance of your student loan debt. The cost of your total student loan debt balance goes up, which means the interest accrued goes up.
The student loan debt burden can get especially heavy in forbearance. Typically, student loan interest is compounded daily . That means interest is calculated at a daily rate and then added to your principal. The very next day, interest is applied to the principal plus the interest from the day before.
Because student loan interest compounds so quickly, it can significantly impact your student loan debt balance if you aren’t covering the interest on your student loans. (It’s worth noting that one exception to this is Perkins Loans, because unpaid interest is not capitalized on Perkins Loans. So if you took out Perkins Loans before the program was discontinued in 2017, you don’t have to deal with interest capitalization.)
What to Do if You’re in Forbearance Already
If you have successfully applied and been accepted into student loan forbearance, there is still a way to keep your debt burden from growing. You could consider making interest-only payments while in forbearance.
While you don’t need to make payments in forbearance, covering the interest could keep your interest from capitalizing and your debt principal from increasing. Even though making payments towards the interest won’t lower your principal, it could at least help ensure the principal doesn’t grow. The more interest you pay, the less your loans will accrue while in forbearance.
Managing Your Student Loan Debt
Feeling like you don’t love the idea of forbearance? Applying for forbearance is totally voluntary, but coming up with a plan to manage your student debt payments might help you feel like you won’t need to turn to forbearance any time soon. If the payments are difficult to maintain, you could consider an income-driven repayment plan for your federal student loans.
Income-driven repayment plans are based on your discretionary income, and typically your payments won’t exceed 15% of your income. If you’d like to consider one of the four income-driven repayment plans, remember that they are only an option for federal loans, and they may make your repayment term longer, which means you’ll pay more interest over the life of your loans.
You could also consider refinancing your student loan debt. You may qualify for a lower interest rate or a lower monthly payment which can ease your student loan debt burden. Both federal and private loans can be refinanced, and you can even combine the two.
When you refinance with a private lender, you’ll essentially combine all your loans into one new loan (which hopefully has a better loan term or a lower interest rate). Keep in mind that refinancing means you’ll no longer have access to federal loan benefits like income-driven repayment plans or forbearance.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.