A student loan forbearance can offer temporary relief to struggling borrowers, and since it can be granted after just a phone call, it's often the first tool borrowers turn to.
But quite frequently, a forbearance only masks the problem, delays an inevitable default and leaves the borrower in a worse financial position. If you can’t afford your monthly student loan bill, here are some questions to ask to determine if forbearance is right for you.
The following advice pertains to federal student loans. Student loans from a state or a private lender will have different deferment and forbearance options. To learn about your specific options, contact the servicer of your state loans, your state’s department of education or your private lender.
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1. How long will my current financial situation last? Losing a job or getting sick can throw your budget into a tailspin. If you’re having trouble making ends meet because of an unexpected turn of events but anticipate your situation will improve in the not-so-distant future, then a forbearance or deferment – more on those later – is probably the right choice for you.
If, on the other hand, you can’t afford your student loan bill because you just accepted your dream job and it pays far less than you anticipated, then you’re probably better off with an alternative repayment option, like income-based repayment or graduated repayment.
It’s important to know that when you put your student loan into forbearance, the interest will continue to accrue and be added on to the principal balance, known as capitalization, at the end of your forbearance period. So a forbearance increases the amount you owe unless you choose to make interest-only payments during this time.
2. Could I qualify for a deferment instead? Similar to forbearance, deferment allows you to temporarily halt your student loan payment. Deferments are preferable to forbearance if you have subsidized Stafford loans because the federal government will pay any interest that accrues during the deferment period. Interest on unsubsidized loans will continue to accrue and be capitalized, just as with forbearance.
Unlike forbearance, deferments have specific criteria you have to meet to qualify, like unemployment, extreme economic hardship, enrolling in school at least half time or active military duty. Deferments are a right for federal student loan borrowers and you cannot be denied a deferment if you qualify – but you will need to fill out the appropriate paperwork.
3. How do I qualify for forbearance? A forbearance is generally granted at the discretion of your loan holder and you can request a discretionary forbearance verbally.
If you don’t meet the criteria for a deferment, you may qualify for forbearance. Your loan holder will typically approve forbearance if you are having personal or problems or are unemployed and have exhausted all of your unemployment deferment eligibility.
Unlike other forbearance types, mandatory forbearance, also known as the excessive debt forbearance, must be granted if you can prove that payments on your federal student loans each month are greater than 20 percent of your total monthly gross income.
Other instances of when you can typically use a forbearance are during medical or dental internships if you’ve used up all of your medical or dental internship or residency deferment eligibility, serving on active military state duty for at least 30 days, receiving a national service educational award from AmeriCorps or performing service that would qualify you for partial loan repayment under some Department of Defense repayment programs.
Also, if you’re a teacher working toward teacher loan forgiveness, your loan holder may put your payments into forbearance if it believes your eventual forgiven amount will cover the amount currently due.
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4. Do I really need to postpone payments, or are there other budget items I can sacrifice? Occasionally the Student Loan Ranger hears from borrowers who have put off their student loan payments when they didn’t really have to. While it may be tempting to delay paying your student loan balance, especially when you’re straight out of college and money is tight, don’t push the panic button unless you have no choice.
First, see if it makes sense for you to lower your payments with a different repayment schedule, and go over your budget with a fine-tooth comb to cut any unnecessary expenses. Retiring your student debt faster may be hard work, but it will save you money on interest in the long run and preserve your deferment and forbearance eligibility for situations when you really need it.
Remember, there are limits to how much deferment and forbearance time you can use. Usually, that's only up to three years for each, but check with your loan holder when you apply. Use this time wisely.
The bottom line is that student loan forbearances are great in-a-pinch tools to avoid delinquency and default, which can ruin your credit and cost you more in late fees. As such, forbearance should only be used for short-term emergencies and you should always check to see if you’re eligible for a deferment first.