Understanding Student Loan Forbearance: A Comprehensive Guide

Student loans can be a significant burden, casting a shadow on financial well-being. When faced with the challenge of repayment, understanding available options becomes crucial. Among these options are deferment, forbearance, and cancellation, each offering distinct pathways for managing student loan obligations. This article focuses on forbearance, its implications, and how it compares to other forms of student loan relief.

Forbearance Explained

Student loan forbearance is a temporary solution that allows borrowers to reduce or postpone their student loan payments due to financial hardship. It's a short-term measure designed to provide breathing room during challenging financial times, rather than a lasting fix. While it can offer immediate relief, understanding its long-term implications is essential.

Deferment vs. Forbearance: Key Differences

Deferment and forbearance are both types of temporary debt relief where student loan payments are reduced or postponed. While the terms may be used interchangeably for personal loans and mortgages, they have distinct meanings for student loans. In general, deferment is a pause in loan payments, while forbearance can include a payment pause or a reduction in payments or interest rates.

The key difference between deferment and forbearance lies in interest accrual, or rather, who pays for the accrued interest. Any federally subsidized loans in deferment essentially have a 0% interest rate; interest continues to accrue during the period, but interest payments are subsidized by the federal government. With forbearance, interest typically continues to accrue on most loans, including unsubsidized federal loans.

Interest Accrual: The Cost of Forbearance

Interest accrual is the most expensive aspect of forbearance. Suppose you owe $30,000 in unsubsidized student loans at 5%. A 12-month forbearance adds roughly $1,500 in unpaid interest. For Federal Loans: Under new regulations, this unpaid interest generally does not capitalize (add to your principal) when forbearance ends. You still owe the $1,500, but you won't pay interest on that interest. For Private Loans: Most lenders still capitalize interest.

Read also: Options to Avoid Default

Types of Forbearance

There are two main types of student loan forbearance:

General (Discretionary) Forbearance: This type is granted at your loan servicer’s discretion for financial hardship, illness, or other personal challenges. Loan servicers may approve up to 12 months of general forbearance at a time and no more than three (3) years total for the life of the loan. Financial difficulties may include a sudden loss of income or a significant, unexpected bill. Because this type of forbearance is at the loan servicer’s discretion, its scope varies. Medical bills that are sudden, substantial, and nonrecurring are a good reason to seek forbearance. A change in employment may mean you changed employers or that your current job description has changed. If you work fewer hours or at a decreased wage, you may be eligible for forbearance. Individual loan servicers may approve forbearances for other reasons at their discretion.
Mandatory Forbearance: This type is required in specific circumstances, such as serving in the military, working in a medical or dental internship, or participating in a national service program. Loans that do not qualify for deferment may be eligible for mandatory forbearance. Only certain types of National Guard duty may qualify. You must be active on the order of a governor, and you must not be eligible for military deferment.

Eligibility for Forbearance

Generally speaking, student loan forbearance is available for federal student loans. Federal student loan forbearance pauses or reduces your payments for a period of up to 12 months. At the end of that time period, if you’re still in a financial hardship, you can reapply for an additional 12 months.

You may qualify for student loan forbearance while you complete an internship or residency in the medical or dental fields. You may only be approved for up to 12 months of forbearance at a time. You may be eligible for forbearance if you are actively pursuing teacher loan forgiveness. In other words, you must currently perform teaching services that qualify you for student loan forgiveness. Under a DoD repayment plan, the federal government repays part of your student loans.

How to Apply for Forbearance

To apply for student loan forbearance, follow these general steps:

Contacting your loan servicer to explain your situation.
Providing documentation of your hardship, if required.
Awaiting approval. Your servicer will confirm the start and end dates of your forbearance period.

If approved, you generally remain responsible for any accrued interest. Entering forbearance generally does not harm your credit score as long as it’s approved before you miss a payment. However, it may indirectly affect your finances if interest accrues and your total balance grows. Lenders reviewing your credit report may also see periods of forbearance as indicators of past financial strain.

Read also: Forbearance Explained

Private Student Loan Forbearance

Private student loans are not protected by the same legislation that regulates the repayment of federal loans. Note that private lenders do not necessarily use the same definitions of deferment and forbearance as the ED. Deferment or forbearance is more difficult to obtain with a private lender. It probably won’t come as any surprise that private student loan lenders aren’t so flexible. If you’re exploring forbearance, first you’ll need to call your lender and see if it’s even a possibility. Some private lenders may offer forbearance, but it’s usually for only a handful of months at a time. You’re not likely to secure a renewal either.

As a rule, interest continues to accrue whenever a private lender does authorize deferment or forbearance. Rules vary among lenders, however.

Forbearance vs. Other Relief Options

Before opting for forbearance, it's crucial to consider alternative relief options, such as:

Income-Driven Repayment (IDR) Plans: These plans scale your minimum monthly payment to a certain percentage of your income. Payments could be as little as $0/mo and count toward forgiveness. With an IBR or similar income-sensitive repayment plan, you continue to make payments with the goal of actively reducing your debt.
Deferment: Deferment may allow you to avoid adding interest to your total debt.
Military Deferment: Consider military deferment (0% interest) if you are active duty military.

When Forbearance Might Be Right

Forbearance can be helpful if you’re facing short-term hardship because it pauses or reduces payments. It may help you stay current, protect your credit, and regain control during difficult times. Consider forbearance if:

Your income is currently $0 or very low.
Your hardship is likely to last less than 3 months.

However, because interest continues to grow, it’s often worth comparing alternatives such as deferment or income-driven repayment.

Forbearance: A Temporary Solution

While forbearance can offer breathing room during a tough financial stretch, it’s important to view it as a short-term measure rather than a lasting fix. Most financial experts warn against forbearance and, to a slightly lesser extent, deferment. Deferment and forbearance may be useful in financial emergencies.

Understanding Deferment

Within almost every student loan agreement are terms allowing a borrower to defer loan payments or pay at a later date. The most commonly used deferment is the Student Deferment. The Student Deferment allows borrowers who have returned to a federally-designated institution of higher learning (a school assigned a Federal OPE Code ) to defer their loans for the time period they are enrolled at least half-time. In most cases, students cannot withdraw before the end of the term or the deferment will be reversed.

In addition, there are several others types of deferments, including:

Economic Hardship - borrowers are entitled to an economic hardship deferment for periods of up to one year at a time, not to exceed three years cumulatively, having provided the school with satisfactory documentation showing they fall into any of the following categories:
- Has been granted an economic hardship deferment for either a Stafford or PLUS Loan for the same period of time for which the Perkins Loan deferment has been requested
- Receives federal or state public assistance, such as Temporary Assistance to Needy Families (formerly, Aid to Families with Dependent Children ), Supplemental Security Income, food stamps, or state general public assistance
- Works full time and earns a total monthly gross income that does not exceed 150% of the poverty line for the borrower's family size
- Serves as a volunteer in the Peace Corps
Unemployment - a borrower may defer repayment on a Perkins Loan for up to three years, regardless of disbursement date and contrary provisions on the promissory note, if seeking and unable to find full-time employment. The school may determine the documents a borrower must provide when applying for this type of deferment.
Fellowship - Borrowers may defer repayment if enrolled and in attendance as a regular student in a course of study that is part of a graduate fellowship program approved by the Department of Education, including graduate or postgraduate fellowship-supported study (such as a Fulbright Grant ) outside the United States.
Pre-Cancellation Services - A borrower must file a pre-cancellation deferment at the beginning of each qualified year of service if wishing to apply for employment cancellation benefits at the end of every year of qualified service. This ensures the borrower is not billed during the year and not expected to make payments during that time. Such borrowers will subsequently qualify to cancel a portion of their loan due to employment services.

The terms of your loan specify how to qualify for the deferments. Speak to your lender if you think you may be eligible for a deferment based on the terms of your student loan. REMEMBER - not all student loans have the same terms, and chances are that you may have received loans from more than one lender. Make sure to discuss deferment availability and how to qualify with the actual lender of the loan (or that lender's billing servicer).

Understanding Cancellation

There are several types of loan cancellations available to student loan borrowers depending on the type of loans they have. The more common cancellations associated with the Perkins Loan are the:

Teacher Cancellation - You qualify for cancellation (discharge) of up to 100% of a Federal Perkins Loan if you have served full time in a public or nonprofit elementary or secondary school system as a: teacher in a school serving students from low-income families; OR special-education teacher, including teachers of infants, toddlers, children, or youth with disabilities; OR teacher in the fields of mathematics, science, foreign languages, or bilingual education or any other field of expertise determined by a state education agency to have a shortage of qualified teachers in that state
Child or Family Services Loan Cancellation - for those who work full time for a public or nonprofit child- or family-services agency providing services to high-risk children and their families from low-income communities

If you qualify for these or any of the other types of employment cancellations, your loan balance will be partially reduced, year-by-year, according to a pre-established cancellation schedule. It is especially important to know to what employment cancellations you are entitled, so that you do not lose out on the benefit. For example, if you consolidate a Perkins Loan, you will lose your Perkins Loan cancellation privileges under the terms of the consolidation, as the consolidation loan money will pay off the Perkins Loan. Likewise, if you make payments to a loan and later found out that you were working in a field that allowed you cancellation rights, the payments you already made will not be refunded. Contact the lender of the loan (or its billing servicer) for more details on qualifying for and obtaining a cancellation.

Alternatives to Forbearance

Refinancing: With refinancing, you can take your mix of loans (private and federal) to a private lender or bank who will then pay them all off for you. Now, instead of owing on lots of different loans, you just owe one lender. And like with consolidation, you can also use refinancing to kick your variable interest rate to the curb in favor of a predictable, fixed rate.
Consolidation: When you consolidate your federal student loans, you combine them all into one new loan. So now you have just one payment each month instead of a bunch. You’ll also have a chance to turn any of your variable interest rates into fixed rates. It’s possible to get a lower monthly payment after you consolidate your loans, but it usually means you’ll have to extend the life of your loan.

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