What does forbearance mean on a student loan?
6 min read
Posted on February 28, 2022
According to the Education Data Initiative, student debt has now reached $1.6 trillion. Across the United States, approximately 43.2 million borrowers are in debt, owing an average of $39,351 each.
These figures show how serious the student loan debt crisis has become for borrowers and why repayment options are so crucial.
Research shows that this debt may contribute to another crisis surrounding mental health. Creating feelings of stress, anxiety, and depression, students must develop a repayment plan that helps them manage their stress to break free from the chains of student debt.
Today, we’ll discuss a viable option — forbearance.
What Is Student Loan Forbearance?
Student loan forbearance is an option that allows you to suspend or lower your student loan payments temporarily during periods of financial hardship.
Are your student loan payments getting on top of you? Do you need a moment to breathe? Are thoughts of your federal student loan debt hurting your daily life? If so, there are ways to get temporary relief.
There are options to either temporarily pause payments or make smaller payments with forbearance. However, because interest continues to accrue on both subsidized and unsubsidized loans, this is not an ideal long-term affordability strategy or repayment method.
Student loan forbearance may help you avoid student loan default.
For example, if you cannot currently pay your loan and it is causing distress in your life, this may be a good option. Under certain conditions, you can try to qualify for deferment first. If that’s not an option and you don’t expect to wait long to begin repayments again, then student loan forbearance is a viable option.
While student loan forbearance does not always have specific eligibility requirements, private student loans may have eligibility requirements. However, you will need to apply and be approved through your student loan provider. The lender or servicer will often decide the forbearance period, and once they do, it cannot be changed.
Bottom line: If you’re looking for a temporary solution because your finances are currently tight, consider student loan forbearance.
Read more: How Much Student Loan Debt is Too Much?
Struggling to Make Payments? You May Be 2.5 Times More Likely to Default
When discussing the topic of student loan forbearance today, it’s critical to shine a spotlight on proactive action. If you are beginning to struggle, it’s essential to take action as soon as possible.
Data shows that student loan borrowers who do not make payments in the first three months are 2.5 times more likely to default at some point compared to those who took the necessary steps to manage their debt in times of need. After accounting for gender, age, race, degree program, loan balance, and institution type, this data remains true.
Not only should you consider the option of forbearance if it suits your current financial situation, but also start looking into long-term repayment options.
Types of Student Loan Forbearance
If you’re interested in student loan forbearance, know that there are multiple types. Here are the most common student loan forbearance types.
Also known as discretionary forbearance, general forbearance is the most common and basic form of student loan forbearance. This type of forbearance most often applies under extreme circumstances. For example, you may currently need to pay medical expenses, are experiencing financial difficulties, have recently changed employment, or are experiencing other financial hardships.
For general forbearance to begin, you will need to apply through your student loan provider. Whether you have a private student loan or a federal loan, you can apply. However, please be aware that approval is not guaranteed.
Another option is mandatory forbearance, which is based on employment status and income. This option is available if you have either a federal or private student loan. Your lender or loan servicer decides if your application is approved.
This option generally applies under the following conditions:
- You have entered a medical internship or residency program
- You are an activated National Guard member
- Your student loan payments equal more than 20% of your current monthly gross income
Please note: You may also have the option to apply for administrative forbearance. If you are currently applying for a specific benefit or federal program, you might be able to place your loans in administrative forbearance. While you wait for your application to be processed, you can seek this option to avoid having to continue paying large payments until your new terms begin.
Benefits & Drawbacks of Student Loan Forbearance
Like any repayment option, it’s essential to weigh the pros and cons. Student loan forbearance is not for everyone.
The benefits of student forbearance include:
- It is a better option than delinquency or going into default on your loans
- Allows you to focus on the most critical expenses when going through periods of financial hardship
- It does not negatively affect your credit score, unless you miss payments
The disadvantages include:
- This debt relief option is a short-term solution only, typically lasting between 2-12 months
- Interest does accumulate, which is then added to your overall debt
- If you continue to renew your forbearance period, this could potentially result in future delinquency or default on your loans
- You cannot pay off your principal balance during this time; only your interest
For example, say your loan is $30,000, and you place your loan on hold for 12 months at an interest rate of 5%. Based on this calculation, you will have added $1500 to your principal balance at the end of your forbearance period. Now you’ll owe $31,500, and interest will accrue on that balance.
Is Student Loan Forbearance Bad?
Student loan forbearance is not a bad option if the alternative is loan default. As discussed, forbearance can be expensive, so view forbearance as a short-term remedy while you develop a more cost-efficient yet manageable long-term payment plan.
Bottom line: Student loan forbearance is a short-term solution and should not be part of your long-term repayment plan.
Student Loan Forbearance vs. Deferment: What’s the Difference?
Many terms are associated with student loans and repayment options, so it’s important to understand what it all means — especially when making repayment decisions.
Student loan forbearance and deferment are similar. However, there are key differences. For example, with deferment, subsidized loans do not accrue interest through the deferment period.
Perkins loans, direct loans, and parent PLUS loans qualify for deferment as long as they are subsidized. If you’re in the military, there are military deferment options that can help to manage your student loan repayment plan.
Again, both are viable options when you’re in a tight financial situation, but neither is ideal for long-term repayment.
The Consequences of Student Loan Debt
If you are experiencing high-stress levels concerning your student debt, know that you’re not alone.
Research shows that many borrowers delay homeownership and remain in unsatisfactory jobs to make their monthly student debt payments. Currently, there are approximately 12 million student loan borrowers in student loan default, student loan deferment, or student loan forbearance. Before default, you enter a status known as delinquency. At this point, you may be able to seek repayment options such as forbearance and deferment. However, these options are no longer available once loans default.
Once a loan is in default, there are several consequences, ranging from the amount of money you’ll owe to a damaged credit score. For federal loans, payments may also be taken out of your wages, or your tax refund and other government payments may be withheld. For private loans, you could end up in court.
Regardless of the situation, student loan debt can profoundly affect borrowers’ mental health and overall well-being.
Student Loan Forbearance FAQs
How long can you forbear a student loan?
Loan servicers will outline the terms of your forbearance period, so not everyone’s terms are the same. However, the industry standard for forbearance periods is offered in two-month increments, lasting 2-12 months. You may be able to renew if you are still experiencing financial difficulty at the end of your agreed forbearance period. Be aware of your forbearance period so that you can seek a renewal before your period ends. That way, you won’t risk missing an upcoming payment.
Is it better to use student loan forbearance or deferment?
As a short-term option, both forbearance and deferment are viable options.
If the bulk of your loans are subsidized or Perkins loans, deferment may be a more attractive option, as you might be able to save on interest. Alternatively, forbearance is a viable option for both subsidized and private loans.
- For deferment, qualifying events include economic hardship, unemployment, cancer treatment, and military service.
- For general forbearance, financial hardship is the primary qualifying event. However, other reasons may be acceptable based on your loan provider’s terms and conditions.
- For mandatory forbearance, registration for AmeriCorps, National Guard, and medical residency are all qualifying events, but always confirm with your loan provider’s terms and conditions.
How does student loan forbearance affect my credit score?
Student loan forbearance does not directly impact your credit score, neither does deferment. If you are worried about making your payments in the near future, it’s important to explore your options now. Missing a payment can affect your credit score and send you on a path toward loan default.
Do all loan servicers offer student loan forbearance?
According to the Department of Education, all federal student loan servicers offer forbearance options. In contrast, private loan servicers can vary, so it’s best to check the specific qualifications based on your loan terms. Contact your loan servicer as soon as possible.
What is the difference between student loan forgiveness and forbearance?
Two other terms to compare are forbearance and student loan forgiveness; here’s how they differ:
- Student loan forgiveness is offered through federal government programs, helping students clear their debt. There are many types of loan forgiveness programs available, including Federal Perkins Loan Forgiveness, Teacher Loan Forgiveness, and Public Service Loan Forgiveness.
- Forgiveness only applies to federal student loans, while forbearance can apply to both federal and private loans.
Refinancing Your Student Loans to Potentially Get a Lower Interest Rate through Splash Financial
Student loan debt can be incredibly stressful. However, refinancing your loans could help you manage your debt, reducing ongoing stress and worry while potentially helping you toward financial freedom. If you’re thinking about refinancing with a private lender, click the button below to explore your options.
The information provided in this blog post is not intended to provide legal, financial or tax advice. We recommend consulting with a financial adviser before making a major financial decision.