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What is Student Loan Forbearance?

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Dominique Broadway
 What is Student Loan Forbearance?

There are times when you face unexpected financial difficulties and find it difficult to stay on top of your monthly student loan repayments. Depending on the exact circumstances, applying for student loan forbearance is one of the best options to consider if you’re stuck with a dwindling income that cannot cover your liabilities.

“Patience” is literally the forbearance meaning and in layman’s terms represents a way to request postponing student loan repayments. A student loan forbearance, if approved, allows borrowers to stop making payments temporarily. It is a good option, but it also means that you have to pay the accrued interest for the period alongside the outstanding amount.

Most federal student loans approve forbearance requests for an initial 12 months and up to a total of 36 months. Private lenders, on the other hand, are said to offer much shorter forbearance periods that generally last only 3 to 12 months.

Student loan forbearance is an option that you should use sparingly. Think of it as the last resort effort to avoid loan default.

Unless you have exhausted both other options - student loan deferment or an income-driven repayment plan - you shouldn’t apply for a forbearance. It doesn’t pause the interest charged, just the payments, hence it is more of a short-term solution that doesn’t impact your credit score.

Forbearance Terms in Federal and Private Student Loans

Generally, borrowers with federal student loans have a better chance of accessing favorable terms when compared with private student loans. Most federal loans allow borrowers to use up to 12 months of forbearance at a stretch.

Borrowers can receive a total forbearance duration of up to 36 months which they can use as and when needed.

During the forbearance period, interest will be accrued and added to the outstanding balance, which means you will have to pay extra interest over time despite delaying payments.

Private loans are stringent with the terms. Most offer forbearance for 3 months at a stretch and up 12 months in total. The interest rates charged during this period are also on the higher side.

You might want to speak with the lender for more information on the terms and rates for forbearance on a private student loan before picking this route.

Example For Forbearance

Before applying for forbearance, remember that you will be liable to pay the interest that accrues during the forbearance period.

When it ends, the interest will be added to the total principal. This method is known as capitalization.

Accordingly, your outstanding principal increases, adding to the overall loan cost.

For instance, if you get a forbearance on the balance loan (say $25,000) at 5.70% for 12 months, you accrue a total interest of $1,425. This interest amount is added to the total outstanding, so you now owe $26,425 (principal) for the rest of the term. Now you must pay the actual interest rate on this new, higher principal amount.

Eligibility Requirements

If contemplating forbearance, you can apply directly with the loan service provider. They will be asking you for documentation depending on the type of forbearance you have requested.

Additionally, you will need a letter from an authorized internship/residency program official certifying your program’s start and end dates.

In addition to this, you will also need to submit copies of gross pay (salary slips), CNCS, and DoD documentation depending on the type of forbearance applied. You will also need to sign an agreement in most cases.

If you are serving a Medical or Dental Internship/residency program, or are working under the US Department of Defense, you will find it easier to get a forbearance. You do need to submit the required documents such as proof of income, an expense report, signed copies of agreements, and more.

You can also be eligible if the total amount you owe exceeds 20% of your gross monthly income. Check with the lender to understand the exact rates and accompanying terms.

Types of Student Loan Forbearance

There are two broad categories of a student loan forbearance – (a) General Forbearance, and (b) Mandatory Forbearance. If you have a federal student loan that is in good standing, you may qualify for a forbearance.

General Student Loan Forbearance

If you are having trouble making monthly repayments on a student loan, you can request forbearance for up to 12 months. However, the approval depends on the discretion of the lender. However, the good thing with federal general student loan forbearance is that borrowers can request another forbearance if the financial woes persist. You are eligible to request for a total of 36 months in total.

General forbearance is mostly granted on grounds of unforeseen medical expenses or any financial difficulty that’s preventing you from repaying. You can request it directly with your service provider. Normally, you will be asked to submit a form and the required documentation.

Mandatory Student Loan Forbearance

A mandatory forbearance applies in different circumstances. Unlike general forbearance, this request doesn’t need the lender’s discretion. If you have a well-maintained federal student loan and meet certain predefined criteria, your loan provider must grant it to you.

You can request mandatory forbearance for a period of 12 months. If needed, you can request another one. Just remember that the interest still accrues and gets added to the total outstanding.

You are eligible for a mandatory federal student loan forbearance if:

  • You are not eligible for a military deferment but are a member of the National Guard
  • You meet the criteria for the Teacher Loan Forgiveness program
  • Your total debt exceeds 20% or more of your gross monthly income (up to 3 years)
  • You are an active-duty serviceman or woman
  • You serve in AmeriCorps
  • You are serving in a medical/dental internship or residency program

Is Forbearance the Right Choice?

Just because forbearance is an available option, it doesn’t necessarily mean that you have to utilize it. You need to consider all the aspects before requesting one. Treat forbearance as a measure for certain circumstances that are beyond control.

It may be a good choice if:

  • You aren’t eligible for a deferment
  • You aren’t eligible for an income-driven repayment plan
  • You are facing a temporary financial crunch
  • You understand that you will pay accrued interest in addition to the outstanding
  • You meet any of the criteria for a mandatory forbearance

Our Tip

Student loan forbearance is a great choice if you’re in a tight spot but know that you’ll get out of it soon. It can surely save you from defaulting on the loan. On the downside, it also means that you will end up paying the accrued interest.

Before requesting student loan forbearance, we recommend checking out all available options and conducting your own research to see if you can avail any other options before exploring forbearance measures.