What Does Forbearance Mean for Student Loans?
Explore how student loan forbearance can offer temporary relief, its types, conditions, and impact on interest and repayment.
Student loan forbearance has become a critical option for borrowers facing financial challenges. It offers temporary relief by allowing individuals to pause or reduce payments, providing essential support during tough economic times. However, forbearance can increase the long-term cost of loans and impact repayment plans. Borrowers should carefully assess its implications before making a decision.
Applying for Forbearance
Applying for student loan forbearance requires understanding the necessary steps and documentation. Borrowers should begin by contacting their loan servicer to discuss their financial situation and determine eligibility. Servicers can guide borrowers through the required forms and information, which may include details about income, expenses, and extenuating circumstances.
After submitting a formal request, the loan servicer reviews the application to confirm eligibility. This process varies depending on the loan type and servicer policies. Borrowers should promptly provide any additional documentation requested and maintain clear communication with their servicer to avoid delays.
Qualifying Conditions
Borrowers seeking forbearance must meet specific conditions. For federal student loans, the U.S. Department of Education assesses financial hardship, unemployment, or significant medical expenses on a case-by-case basis.
Private lenders follow their own criteria, which can differ from federal standards. Borrowers should review their loan agreements and consult their servicer to understand the requirements. Documentation such as income statements, medical bills, or evidence of job loss is often needed to support the application.
Types of Forbearance
Student loan forbearance is divided into General Forbearance, Mandatory Forbearance, and Administrative Forbearance. Each type has its own criteria and implications.
General Forbearance
General forbearance, or discretionary forbearance, is available for federal borrowers facing temporary financial difficulties. Loan servicers decide whether to grant this relief for reasons like medical expenses or employment changes. During this period, interest accrues on all loan types, including subsidized loans. For instance, a borrower with a $30,000 loan at a 5% interest rate could accrue $1,500 in interest over 12 months, which would be added to the loan balance.
Mandatory Forbearance
Mandatory forbearance must be granted if borrowers meet certain criteria, such as serving in a medical internship, participating in a national service program, or having monthly student loan payments exceeding 20% of gross monthly income. Interest accrues similarly to general forbearance. Borrowers may consider making interest-only payments to minimize additional costs.
Administrative Forbearance
Administrative forbearance is applied in cases like natural disasters or military mobilization, where borrowers are temporarily unable to make payments due to external circumstances. Payments are suspended without penalties, but interest continues to accrue. Borrowers should stay informed about the terms and duration of administrative forbearance and prepare for repayment once it ends.
Accrued Interest
Accrued interest is an important factor for borrowers considering forbearance. While payments are paused or reduced, interest continues to accumulate on the unpaid balance. This can significantly increase the total loan cost, as the accrued interest is often capitalized, raising the principal balance and future interest calculations. For example, a $20,000 loan at a 6% interest rate could result in $1,200 in accrued interest during a 12-month forbearance, which would then be added to the loan balance.
Resuming Repayment
When the forbearance period ends, borrowers must resume repayment. Loan servicers notify borrowers of the updated payment schedule and any changes to the loan balance due to accrued interest. Reviewing this information is essential to avoid surprises. Borrowers struggling to make full payments should explore alternative repayment plans. Federal loans offer options like income-driven repayment (IDR) plans, which adjust payments based on income and family size. Private loan borrowers can consult their lenders for refinancing or restructuring options.
Other Options for Payment Relief
Forbearance is not the only option for borrowers facing financial hardship. Deferment, for instance, may allow subsidized loans to pause interest accrual under certain conditions, such as school enrollment, military service, or public service participation.
Loan forgiveness programs also provide alternatives. Public Service Loan Forgiveness (PSLF) offers discharge after 120 qualifying payments for borrowers in government or nonprofit jobs, while teacher loan forgiveness programs assist educators in underserved areas. Private loan borrowers may explore hardship programs, which can include temporary interest rate reductions or extended repayment terms. Borrowers should compare these options to find the most suitable solution for their circumstances.