Lana Oconnell
If you're wondering whether you can pay off your student loans while they're in forbearance, the answer is yes. There are benefits to making payments during this time, as any payments made will go directly towards your principal balance since interest will not accrue. This means that you can reduce your balance faster than if you were also paying interest. Additionally, taking advantage of the forbearance period can give you some extra room in your budget to stay on top of other debt payments. However, it's important to note that if you're pursuing a Public Service Loan Forgiveness (PSLF) or Income-Driven Repayment (IDR) plan, any payments made during the forbearance will not count towards loan forgiveness.
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What You'll Learn
Benefits of making payments during forbearance
Forbearance is a temporary postponement or reduction of your student loan payments because you are experiencing financial difficulty. While forbearance can be a helpful option for those who need it, there are benefits to continuing to make payments during this period if you are able to.
Firstly, during forbearance, interest will not accrue, which means that any payments made will go directly towards your principal balance. This can help you reduce your balance faster than if you were also paying interest. Even if you are unable to make the full payment amount that you were making prior to forbearance, paying what you can will help you get ahead of your repayment schedule.
Secondly, making payments during forbearance demonstrates good financial management. While forbearance will not negatively impact your credit score, consistently making payments on time will help you build a strong credit history and boost your credit score. Late payments can remain on your credit report for up to seven years, so it is important to stay current on your loans.
Additionally, if you are enrolled in a loan forgiveness program, such as Public Service Loan Forgiveness, continuing to make payments during forbearance will ensure that you stay on track. Any payments made during forbearance will be applied to future bills after the forbearance period ends.
Finally, making payments during forbearance can provide peace of mind and reduce financial stress. By reducing your principal balance, you will have less debt to repay once the forbearance period ends. This can help you stay on top of your finances and improve your overall financial health.
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Forbearance due to administrative or technical issues
Administrative forbearance is a temporary suspension or reduction of federal student loan payments initiated by the loan servicer or the U.S. Department of Education in response to specific circumstances. This includes national emergencies, significant technical issues, or account management issues. During this period, interest generally doesn't accrue on the loans, providing relief to borrowers without increasing their debt burden.
Administrative forbearance is typically automatic and can be applied retroactively to federal student loans. This can be useful if there are administrative or technical issues, such as receiving incorrect or late billing statements, that prevent borrowers from making payments. It is important to note that, unlike regular forbearance, which requires a borrower's request, administrative forbearance is automatic and based on the situation.
In certain cases, such as with the SAVE Plan (Saving on a Valuable Education Plan), millions of borrowers were placed in administrative forbearance due to pending legal disputes and multistate lawsuits. While the courts decide the viability of the program, borrowers remain in administrative forbearance, with payments paused and interest rates at 0%.
Additionally, in October 2023, the Department of Education found that 2.5 million borrowers with the servicer MOHELA received their billing statements late or with incorrect amounts. As a result, the affected borrowers were placed in administrative forbearance until the issue was resolved.
During administrative forbearance, it is possible to make payments toward the loan principal. However, it is essential to contact your student loan servicer or a financial advisor for specific instructions regarding your loan status and repayment options.
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Forbearance and credit score implications
Forbearance is a type of financial accommodation that may be offered by a lender. It often describes a temporary change in payment terms for your account. This change can be negotiated with your lender and may include suspended or reduced payments. Lenders may offer payment alternatives to financially strapped customers on student loans, mortgages, car loans, credit card balances, utilities, property taxes, small business loans, and personal loans, among others.
Loan forbearance can be a great relief during times of struggle and need, but it is important to understand the implications for your credit score. If your lender grants you relief from financial hardship in the form of loan forbearance, your credit scores should be unaffected as long as you stick to the agreed-upon schedule for resuming regular payments and making up for missed payments during the forbearance period. However, depending on the type of loan involved and the way the lender reports your payment status to the national credit bureaus, lenders reviewing your credit reports may be aware that you've experienced financial hardship.
Before entering a forbearance agreement, check with your lender about their policy so you know what others will see if they review your credit reports during or shortly after the forbearance period. Lenders and loan servicers won't extend forbearance unless you request it and provide evidence that you'll be able to cover all repayments when forbearance ends. If your arguments are unconvincing, or if you have a spotty payment history or low credit scores, the lender may decline your forbearance request.
It is important to note that forbearance is usually temporary, and when it ends, you will have to repay the missed payments. This may mean that your payments are higher when the repayment period begins. To prepare for this, you can try stowing away your expected new loan payments into a savings account to see how it impacts your finances each month. This will help build your emergency savings and ensure that the new payments are feasible.
To summarise, forbearance can help protect your credit score during times of financial hardship, but it is important to understand the terms of your agreement, including how it will be reported to credit agencies, and to ensure that you can resume regular payments once the forbearance period ends.
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Forbearance during the COVID-19 pandemic
Mortgage forbearance plans played a crucial role in providing short-term liquidity to borrowers, allowing them to manage their finances during the crisis. Freddie Mac, for instance, extended mortgage relief to borrowers, offering forbearance plans that provided payment relief for up to 12 months, with an option for a further 6-month extension. This relief suspended late charges and penalties, preventing borrowers from defaulting on their mortgages and potentially depressing the housing market.
The implementation of forbearance policies helped stabilize the economy by reducing the number of defaults. Without forbearance, job losses and decreased income would have increased the ratio of mortgage payments relative to income, leading to financial distress and potential foreclosures. The availability of forbearance options also allowed borrowers to remain current on their loans, with many continuing to make mortgage payments even after entering forbearance.
While forbearance provided much-needed relief for borrowers, it is important to note that making payments during this period may not count towards loan forgiveness. Additionally, the forbearance policies during the COVID-19 pandemic were implemented in response to an unprecedented crisis, and the lessons learned may inform future responses to similar situations.
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Alternative options to forbearance
Forbearance is a last resort to avoid defaulting on your student loan. It is a short-term solution for those who cannot pay their loans but expect to be able to resume repayment within a year or sooner. Due to the costs involved, it is recommended that you only use forbearance if you have no other choice.
Student Loan Deferment
If you have federal student loans, you can apply for a deferment, which will pause your payments. Deferment is often a better option than forbearance because you won't have to pay interest on any subsidized loans. You can qualify for deferment in certain circumstances, such as unemployment, so be sure to check with your loan servicer if this is an option for you.
Income-Driven Repayment Plans
If you're worried about affording your federal student loans in the long run, consider enrolling in an income-driven repayment plan. These plans tie your payments to a percentage of your income, so you can pay as little as $0 per month. While you may pay more interest over time due to the longer repayment terms, this option can help keep your payments manageable.
Interest-Only or Interest-Free Payments
If you have private student loans and are struggling to make payments, reach out to your lender to discuss relief options. They may allow you to make interest-only or interest-free payments for a limited period. Review your loan contracts and communicate with your lender to understand the options available to you.
Build an Emergency Fund
If your federal loans are currently in an interest-free forbearance, consider taking advantage of this time to build up your savings. Focus on building an emergency fund or tackling other high-interest debts, such as credit card debt. This will put you in a stronger financial position before resuming your student loan payments.
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Frequently asked questions
Yes, you can still make payments towards your student loans while in forbearance.
Yes, there are benefits to making payments on your student loans while they're in forbearance. During this time, interest will not accrue, which means any payments made will go directly towards your principal balance.
Your credit score will not be penalized for not making payments during this time. As long as your account remains in forbearance, the payment status on your credit report will continue to appear as it did when the account was first placed into forbearance.
If you are struggling financially, taking advantage of this forbearance period can give you room in your budget to stay on top of other debt payments. However, if your situation changes and you are able to make some payments towards your student loan, it may be wise to do so.
