If you are regularly paying your student loans but found yourself in a situation where you cannot make the payments, then your loan servicer will probably suggest a few options including student loan forbearance. But what does it really mean?
Well, forbearance is an option that allows you to temporarily delay payments. Meaning that you will not need to make payments as you have agreed in your payment plan for a specific amount of time which could go up to 12 months.
However, it is not that simple, it has a few traps that you might want to find out before accepting the deal, even if this is the only option your loan servicer suggested. Keep reading to find out more.
What Is Student Loan Forbearance?
Forbearance is a way for students who are paying student loans to delay or reduce loans cost temporarily for up to 12 months. Until they can make payments on a monthly basis again. However, being in forbearance does not stop loan interest from capitalizing.
Once the student’s loan is switched out of forbearance and is back to paying their payment plan, that interest gets added to the student’s total balance or capitalizes.
This means that if you do not keep on making payments to cover that interest that keeps piling up, your balance will keep on increasing as well, making it much higher than it essentially was.
Additionally, you will be expected to pay even more interest due to the accruing interest on your loan payments.
Therefore, forbearance is only recommended if you have a temporary financial setback. This is because it does not stop the loan and the balance keeps increasing, so it is considered a good choice for a short-term solution.
Who Should Use Student Loan Forbearance?
Student loan forbearance is recommended as a temporary solution for financial problems. This is because forbearance keeps on generating interest that adds to your total balance, meaning that you will be paying more than you used to when you are switched off the forbearance.
Therefore, if you are facing temporary financial issues, unable to afford the student loan payments for a couple of months, or qualify for deferment, then going for loan forbearance is not a bad option and will not heavily impact your finances when you are back to making payments.
Student Loan Forbearance Overview
Just like any other service, forbearance has its pros and cons. However, if you are -for example- choosing between wage garnishment, loss of an income tax refund, and forbearance, then forbearance is your best option for two reasons; it does not impact your credit score and does not heavily impact you financially, too.
However, it is worth noting that if you went with deferment, then the accrued interest will most likely be a lot less than what you would pay for the personal loan interest rate.
Still, the fact that the interest is capitalized means that you will be paying more over the remainder of the life of your loan.
Advantages of Student Loan Forbearance
- It does not impact your credit scores
- Lower interest rates than personal loan or payday
- Allows you to pay urgent expenses
- Better than default or garnishment
- Short-term, temporary solution
Disadvantages of Student Loan Forbearance
- Expensive capitalized accrued interest rates
- Not a solution for long-term financial problems
- Loan default could happen if the renewal was repeated
- Late or missing payments can affect your credit score
How Does Student Loan Forbearance Affect Credit Score?
While forbearance is acknowledged on your credit reports, it does not affect your credit score unless you have missed your payments or paid them late. Forbearance is good when used temporarily to pay off essential expenses like utilities or housing.
However, it should not be used as a long-term solution as it can be quite expensive due to the accruing interest.
Using forbearance as a long-term solution by constantly renewing your status can result in loan default or even damage your credit score which will take a very long time to fix.
The best thing to do while in forbearance is to avoid unnecessary expenses and complications is to keep paying while your application is still being processed, try to pay the interest as it accrues every month, and make sure to switch off forbearance as soon as you can.
How to Lower Costs While Your Student Loan Is in Forbearance?
Forbearance is usually used for short-term relief of student loans to pay the essential expenses such as a medical emergency, utilities, and housing.
The best way to lower the accruing expenses while your student loan is in forbearance is to make payments towards the interest that keeps occurring to make it easier for you when switched off forbearance.
What Are the Alternatives to Student Loan Forbearance?
We highly recommend thinking about it when someone is choosing a college because if you are looking for a long-term solution then it is best you look into other repayment plans, your loan servicer will be able to give you more detailed info about each of the following options available for federal loans:
- An extended repayment plan allows you to extend the period of the loan, it can be extended up to 25 years which lowers your monthly payments, however, it increases the amount of interest you pay over the 25 years.
- One of the great options is the income-driven repayment plan. This way, your payment is calculated based on your income, meaning that you will not need to pay more than 10% of your income. This payment term can be extended up to 20-25 years. The nice part is, if there is any balance remaining at the end of that term, it will be forgiven.
- Another great option is the graduated repayment plan. This is a method recommended for those who are sure their pay increases on a yearly basis. This is because this repayment method starts with low payments, and increases gradually every two years for the repayment period which is 10 years.
Student loan forbearance should be your very last option as it could get complicated in the process. Try using it only if you need temporary relief but not as a long-term solution.
Also, try speaking with a loan servicer to find out more about all repayment options before choosing to go for forbearance.
