If you find yourself in a situation where you can’t pay your student loans, your loan servicer might suggest forbearance. What does that mean? Is it really the best option?
Forbearance is an option to delay your payments. That means you don’t have to make payments while your loans are in forbearance.
That sounds pretty great, right?
Unfortunately, it’s not as simple as that, and it may not be the best option for you, even if it’s the only one your servicer told you about.
Update: If you're looking for options specifically related to the coronavirus pandemic, check out our full guide: Student Loan Options During The Coronavirus Pandemic (including payments, deferment, forbearance, and more).
The Basics
Forbearance is an option to delay student loan payments in case you are temporarily unable to make your monthly payment. While in forbearance, your loans continue to accrue interest. That interest capitalizes, or gets added to your balance, when your loans switch out of forbearance and back into your payment plan.
That means, unless you make payments that cover the interest while in forbearance, your balance will be higher when your loans re-enter repayment. Essentially, you’ll be expected to pay interest on the interest that accrued.
Because forbearance does not pause the loan completely and the interest keeps accruing, it should only be used if you are having a temporary problem making payments and need a short-term solution.
Federal vs. Private Student Loan Forbearance
Federal student loans generally offer more generous forbearance terms than private companies. You can use up to 12 months of forbearance at a time and 3 years of total forbearance. This article focuses on federal forbearance.
Private student loan companies are not held to the same terms regarding forbearance, so each company will have a different policy and offerings. Some companies will offer forbearance in 3-month stints, while others may be more generous. Occasionally, a private company may not offer forbearance at all, but they could still work with you if you lose your job or need short-term assistance.
Not To Be Confused With Deferment
The other way to delay federal student loans is through deferment. Unlike forbearance, you are not responsible for paying the interest of subsidized or Perkins loans in deferment.
If a private student loan company talks about deferment, they are really talking about forbearance. We know, it’s confusing, but keep track of who you’re talking to and make sure to ask about interest if you are considering delaying your private student loan payments.
Types Of Student Loan Forbearance
Not all forbearances are the same. For federal student loans, there are two types:
In special cases, your servicer can place your loans in forbearance without requiring you to fill out a form. Instead, a verbal agreement — or even no direction at all — is all that’s needed. For example, natural disasters often result in borrowers unable to make payments. The department often offers forbearance for victims of federally declared natural disasters so those borrowers don’t have to worry as they get their life back in order.
Additionally, your servicer may place your account in forbearance for a variety of reasons. For example, while servicers are processing applications for repayment plans, they may put your account in forbearance so you don’t have to make payments you may not be able to afford.
Is Forbearance The Right Choice?
It might be tempting to jump at the chance to not make any payments for any amount of time. But we suggest taking a close look at your situation before you leap. Consider the following questions:
Depending on your answers, you may decide to pursue forbearance. If you’re starting to think it’s not right for you, don’t despair — there are other options, most notably for federal loans.
Advice While In Forbearance
If you decide that forbearance is the best option, we have some advice. If you are able, we suggest making interest-only payments during that time.
Even making small payments that only chip away at the interest will benefit you in the long run. The less interest you let accrue while your loans are in forbearance, the less your principal will go up when the forbearance is over — and the less you’ll pay overall.
Also, if you are ever placed in forbearance when you can still make payments, we suggest canceling the forbearance so you continue to work on lowering your principal instead of letting it grow until it’s too much to handle.
When To be Wary Of Forbearance
If you’re enrolled in Public Service Loan Forgiveness, you need to make 120 qualifying payments while in an income-driven repayment plan. When applying for the annual certification to stay in that plan, your servicer may automatically place you in forbearance. Depending on the timing, it may rob you of a qualifying payment. Even if you make a normal payment, if your account is in forbearance, that payment won’t count.
To make sure you don’t miss out on any qualifying payments, you can choose to cancel that forbearance to return to your normal payment plan and make the monthly payment during that time.
But be careful: If your servicer takes its time to process your IDR application and your IDR year ends, you’ll be put back in the Standard plan, in which you’ll be expected to make a higher payment.
It's also important to note that many student loan scams involve forbearance.
Alternate Options
If you need a longer-term solution, you might need to look into other repayment plans. The following are some of the options available to you for federal loans:
If you have private loans and need a longer-term solution, your servicer may be able to work with you — for example, some will reduce interest if you sign up for auto-payments — but the best option might be to refinance.
When you look into student loan refinancing, pay special attention to interest rates. The goal is to get a lower interest rate than you currently have, and lower payments will come naturally. Remember, the longer the term of the loan, the more you pay in interest overall.
Even if you can afford your payments, if your interest is high it’s a good idea to look into refinancing. With a lower interest rate, you can either make payments equal to your current payments for a shorter period of time, or you can make lower payments and focus on your other financial goals, like retirement or saving up for a house.
Closing Thoughts
When confronted with the forbearance option, it’s a good idea to take a step back and look at all your options. While forbearance might be the right choice for some situations, often borrowers need a longer-term solution.
If you're not quite sure where to start or what to do, consider hiring a CFA to help you with your student loans. We recommend The Student Loan Planner to help you put together a solid financial plan for your student loan debt. Check out The Student Loan Planner here.
Have you ever considered forbearance before? Why or why not?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.