Editor's Note: Since the writing of this article, the federal Student Loan Debt Relief program has been blocked due to two court decisions; the Supreme Court has agreed to hear arguments for both appeals in February. In the meantime, the Biden administration extended the federal student loan payment pause into 2023. The US Department of Education announced loan repayments may resume as late as 60 days after June 30, 2023.
If you’re facing a financial squeeze, you could catch a temporary break on repaying a student loan but end up owing more. That’s forbearance.
Interest accrues on nearly all federal student loans in forbearance and on all private student loans, if the lender has such a program. After the payment pause, the interest is typically added to the principal balance, a process called interest capitalization. (The pandemic-related government forbearance, which paused interest accrual on federal student loans, was an exception.) New regulations that take effect in July 2023 will eliminate interest capitalization, saving borrowers money.
Even though a payment reprieve can bring short-term relief, it might be worth exploring alternatives.
What Does Student Loan Forbearance Mean?
During an approved period of forbearance, a borrower is allowed to temporarily suspend loan payments.
There are two main types of forbearance for federal student loans: general and mandatory.
With general forbearance, sometimes called discretionary forbearance, your loan servicer will decide whether or not to grant your request for forbearance if you are unable to make your loan payments.
General forbearance is available for Direct Loans, Federal Family Education Loan (FFEL) Program loans, and Perkins Loans for up to 12 months at a time. Borrowers still experiencing hardship when the forbearance period expires can reapply and request another general forbearance.
For now, unpaid interest is capitalized on Direct and FFEL loans but not on Perkins Loans, according to the Federal Student Aid office. As of July 2023, new regulations will eliminate all interest capitalization when a borrower exits forbearance.
Your loan servicer is required to grant you forbearance if you meet certain criteria including:
• You are serving in a medical or dental internship or residency program.
• The total amount you owe each month for all federal student loans is 20% or more of your total monthly gross income.
• You are serving in an AmeriCorps position for which you received a national service award.
• You are performing a teaching service that would qualify you for teacher loan forgiveness.
• You qualify for partial repayment of your loans under the Department of Defense Student Loan Repayment Program.
• You are a member of the National Guard and have been activated by a governor, but you are not eligible for a military deferment.
Direct and FFEL loans qualify for mandatory forbearance for any of the above reasons. Perkins Loans also qualify if a borrower has a heavy student loan debt burden.
Mandatory forbearance is to be granted for no more than 12 months but can be extended if you continue to meet eligibility requirements.
Private Student Loan Forbearance
Some private lenders offer student loan forbearance as well.
If you’re having trouble making private student loans payments, you’ll be smart to contact your loan holder immediately. Interest-only payments, interest-free payments for a limited time, or a change in interest rate could be options.
Who Should Use Student Loan Forbearance?
Forbearance on federal student loans may be a good choice if you don’t qualify for deferment and your hardship is temporary.
While both student loan deferment and forbearance offer the opportunity to press pause on your student loan payments, there’s a key difference: During deferment, you may not be responsible for paying interest that accrues on Direct Subsidized Loans, Federal Perkins Loans, and the subsidized portion of Direct Consolidation Loans or FFEL Consolidation Loans.
With private student loans, borrowers anticipating trouble making payments would be wise to contact their loan servicer to seek a solution. Whether the lender calls it deferment or forbearance, interest accrues and is the borrower’s responsibility.
Recommended: Student Loan Deferment vs Forbearance
Is Student Loan Forbearance Bad?
As a stopgap measure, no.
It certainly beats having late payments or a loan default on your credit reports. Most federal student loans enter default when payments are 270 days past due, but federal Perkins Loans and private student loans can go into default after just one missed payment.
If you default on a student loan, you don’t just shrug off the responsibility. The entire balance of a federal student loan (principal and interest) becomes immediately due. If the loan is placed with a collection agency, add 17.92% of the loan amount to your principal, interest, and fees if your loan is held by the Department of Education.
If your federal student loan is in collections and you do not enter into a repayment agreement or you renege on the agreement, the collection agency can garnish your wages — up to 15% of your disposable pay.
As if that weren’t enough of a deterrent, borrowers in default can expect to have part or all of their tax refund taken and applied automatically to federal student loan debt.
After a default on a private student loan (usually after a single missed payment), private lenders may hire a collection agency or file a lawsuit. Any collection fees should be stated in the loan agreement.
Pros and Cons of Student Loan Forbearance
Postponing payments has its advantages and disadvantages.
Upsides of Student Loan Forbearance
• Can help you avoid the major credit effects and fees of late payments and student loan default.
• Does not affect your credit scores because the late payments are not reported on your credit reports. (Ensure that you continue making payments until your forbearance application has been approved.)
• Can give you a chance to catch your breath when money is tight.
Recommended: How Does Deferring a Loan Affect My Credit Score?
Downsides of Student Loan Forbearance
• Interest will accrue. If you do not pay that interest, it will be added to your principal balance, which will cause more interest to accrue over time and likely also increase your monthly payment. However, starting in July 2023, interest will no longer be capitalized.
• If you’re pursuing federal student loan forgiveness, any period of forbearance probably will not count toward your forgiveness requirements.
• It’s a short-term answer.
Recommended: Student Loan Forgiveness Programs
Alternatives to Forbearance
Income-Driven Repayment Plans
If you’re having trouble making student loan payments because of circumstances that may continue for an extended period, or if you’re unsure when you’ll be able to afford to resume payments, one option is an income-based repayment plan.
Monthly payments hinge on your income and family size. Income-driven repayment plans are intended to also forgive any remaining loan balance after 20 or 25 years.
Student Loan Refinancing
Refinancing your student loans with a private lender is another option to consider. You’d take out one new loan, hopefully with a lower interest rate, to pay off one or more old loans.
You may also be able to change the length of the loan.
Borrowers eligible for student loan refinancing typically have a solid financial history, including a good credit score. Just realize that if you refinance federal student loans with a private lender, you give up federal benefits like income-driven repayment, loan forgiveness, and federal forbearance.
Recommended: Student Loan Refinancing Calculator
What does forbearance mean? Student loan forbearance is an option when you’re struggling to make payments, but in almost all cases interest will accrue and be added to the loan. Deferment, income-driven repayment, or refinancing could make more sense.
SoFi offers student loan refinancing with a fixed or variable interest rate and a simple online application.
SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
CLICK HERE for more information.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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