Student Loan Forbearance: Advantages and Disadvantages – Personal Loans

Table of Contents

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• Overview

• General Federal Loan Forbearance

• Mandatory Federal Forbearance

• Private Student Loan Forbearance

• Pros and Cons

• Alternatives to Forbearance

• The Bottom Line

Student loan forbearance is a way to suspend or lower your student loan payments temporarily, typically for 12 months or less, during times of financial stress. Forbearance is not as desirable as deferment, in which you may not have to pay interest that accrues during the deferment period on certain types of loans. With forbearance you are always responsible for accrued interest when the forbearance period is over.

Key Takeaways

• Forbearance is for temporary (12 months) relief only. It is not a long-term solution.
• Deferment or an income-driven repayment (IDR) plan are both preferable to forbearance.
• Forbearance for federal student loans takes two forms—general and mandatory.
• You must continue making required payments on your student loans until your forbearance application has been approved in order to avoid default.
• To lower costs, try to pay interest as it accrues while the loan is in forbearance.

Student Loan Forbearance: An Overview

With all student loan forbearance, interest on your loan continues to accrue during the deferral period and is usually capitalized (added to the loan amount owed) at the end of the deferral period unless you pay the interest as it accrues.

Perkins loans are an exception to the capitalization rule. With a Perkins loan your interest accrues during the deferral period, but is not capitalized. Instead it is added to the interest balance (not the principal) during repayment, unless you pay it as it accrues. (Although Perkins loans stopped being offered in 2017, many people are paying back what they borrowed through these loans.)

Federal student loan forbearance is usually granted for 12 months at a time and can be renewed indefinitely for Direct and FFEL loans. (The FFEL student loan program was discontinued in 2010 and replaced by the Direct loan program, but many people who had FFEL loans are still repaying them.) Perkins loans have a cumulative limit of three years on forbearance. Conditions and amounts for some types of federal student loan forbearance are mandated by law. In other instances, the loan servicer has discretion.

Private student loan forbearance is typically granted for 12 months, but lenders rarely offer renewal. Conditions and amounts for private loan forbearance are up to the lender.

If you are in default on your student loans, you are not eligible for any remedy discussed in this article.

General Federal Student Loan Forbearance

If you are having trouble making payments on your Direct, FFEL, or Perkins loans and don’t qualify for deferment, you can request a general forbearance of up to 12 months from your student loan servicer.

If your financial problems continue, you can request a new general forbearance of up to 12 months. As noted above, Perkins loans permit total general loan forbearance of up to three years while Direct and FFEL loans have no restriction on the number of times your request for general forbearance can be approved. Your loan servicer, however, may set a maximum period on an individual basis for Direct and FFEL loans.

General forbearance is at the discretion of the loan servicer and is typically granted due to unforeseen medical expenses, being unemployed, or almost any financial difficulty that prevents you from making loan payments. You may request a general forbearance by filling out the online form or by calling your loan servicer and requesting a forbearance over the phone.

Mandatory Federal Student Loan Forbearance

Unlike a general forbearance, which is at the discretion of your loan servicer, you must be granted a mandatory forbearance if you qualify and request it. Each type of mandatory forbearance has its own form and required documentation. Conditions under which you may qualify include (pdfs will download):

• Participation in a medical or dental internship or residency (Direct and FFEL loans only)
• Total student loan payments of 20% or more of your monthly gross income (Direct, FFEL, and Perkins loans)
• Service in AmeriCorps (Direct and FFEL loans only)
• Qualification for Teacher Loan Forgiveness (Direct and FFEL loans only)
• Qualification for partial repayment of your student loans under the U.S. Department of Defense Student Loan Repayment Program (Direct and FFEL loans only)
• Activated service in the National Guard when it doesn’t provide for a military deferment (Direct and FFEL loans only)

Private Student Loan Forbearance

Your forbearance options with private student loans will vary by lender, but are generally less flexible than those available on federal loans.

Many private lenders extend a forbearance option while you are in school or taking part in an internship or medical residency. Some let you make interest-only payments while in school. In-school forbearance typically has a time limit which could create problems if you take longer than four years to graduate. Most also offer a six-month grace period after graduation.

Some private lenders grant forbearance if you are unemployed or are having difficulty making payments after you graduate. Typically, these are granted for two months at a time for no longer than 12 months in total. There may be an additional fee for each month you are in forbearance.

Other types of forbearance are often granted for active duty military service or if you have been affected by a natural disaster. With all private loans interest accrues during forbearance and is capitalized unless you pay it as it accrues.

Pros and Cons of Student Loan Forbearance

As with most financial tools, student loan forbearance has both advantages and disadvantages. If your choice is between wage garnishment or loss of an income tax refund and forbearance, for example, the latter is a better option, both financially and credit-wise.

It’s worth noting that accrued interest during deferment will likely be less costly than the interest rate you would pay when taking out a payday or personal loan. However, the fact that accrued interest is capitalized means you will pay more over the life of the loan than you would if you were able to avoid forbearance.

Pros

• Better than garnishment or default

• Lower interest than payday or personal loan

• Frees you to pay critical expenses

• Has no impact on your credit score

Cons

• Not a long-term solution

• Capitalization of accrued interest is expensive

• Repeated renewal could result in loan default

• Late/missing payments hurt your credit score

Forbearance provides temporary breathing room to allow you to pay important expenses such as housing and utilities, but can be very costly if you try to use it as a long-term solution by constantly renewing your status. This could ultimately result in loan default or worse, all bad credit omens along with missed or late payments.

While forbearance is noted on your credit reports, it does not result in a lower credit score unless you have late or missed payments. To avoid complications and unnecessary expense during and following forbearance, keep making payments while your application is being processed, get out of forbearance as soon as you are financially stable, and, if possible, make interest payments as they accrue.

Alternatives to Forbearance

Before applying for forbearance and depending on the type of loan(s) you have, you should consider two alternatives: deferment and income-driven repayment (IDR) plans.

Deferment, like forbearance lets you pause payments temporarily—typically up to three years. If you qualify for deferment and have subsidized federal loans, accrued interest during deferral will be paid by the government. All you will owe at the end of deferment is the original loan amount.

Unsubsidized federal loan deferment and private loan deferment are treated the same as forbearance, meaning interest accrues and is capitalized at the end of the deferral period.

IDR plans for federal student loans come in four forms: Revised Pay As You Earn Repayment Plan (REPAYE); Pay As You Earn Repayment Plan (PAYE); Income-Based Repayment Plan (IBR); and Income-Contingent Repayment Plan (ICR).

Payments are usually a percentage of your discretionary income and can be as low as $0 per month. One disadvantage is that because repayment typically takes longer, you will pay more interest over the life of the loan. A possible advantage is that if your loan is not totally repaid by the end of the repayment period—20 to 25 years—any balance will be forgiven. You can learn more and sign up for an income-driven repayment plan here.

The Bottom Line

Student loan forbearance is almost always a last resort, not a first option. Use it if you need temporary relief and don’t qualify for deferment. For long-term problems consider an income-driven repayment (IDR) plan instead. If possible, pay interest as it accrues to avoid paying interest on interest when you do resume repayment. Finally, when you first begin to experience financial trouble, talk to your loan servicer to explore all repayment options.