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Student loan forbearance is a temporary postponement or reduction of your student loan payments due to financial hardship. Forbearance allows you to pause or reduce your payments for a set period, providing relief if you're struggling financially. During this time, interest may accrue, increasing the overall cost of your loan. However, if you choose to make payments during forbearance, 100% of your payment will go directly towards the principal, reducing your balance faster. While forbearance can provide temporary relief, it's important to consider the long-term financial implications, as interest accrual can increase the total cost of your loan. Therefore, if your financial situation improves and you can resume payments, doing so during forbearance may be advantageous.
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What You'll Learn
Benefits of making payments during forbearance
Forbearance on student loans can be a helpful option if you're facing financial hardship, but it's not ideal as a long-term solution. While forbearance can help you stay in good standing and avoid delinquency, which can harm your credit, interest continues to accrue, increasing the amount you owe over time.
- Reducing Your Balance Faster: During forbearance, you can take advantage of the temporary 0% interest by making payments toward your principal balance. This means that every dollar you pay goes directly towards reducing your debt, helping you lower your balance faster than if your payments were also covering interest charges.
- Staying Ahead of Your Debt: Making payments during forbearance can put you in a better position when your regular repayment schedule resumes. The more you can pay down your loan now, the less you'll owe in the future, including interest charges, which will accrue once the forbearance period ends.
- Maintaining a Strong Credit History: While forbearance won't negatively impact your credit score, consistently making payments on time helps build a strong credit history. A good credit history can benefit you in various aspects of your financial life, such as when applying for other loans or credit cards.
- Saving Money in the Long Run: By reducing your principal balance during forbearance, you can save money in the long run. The lower your principal balance, the less interest you'll accrue daily once the forbearance period ends.
- Achieving Financial Goals: If your goal is to aggressively pay off your student loans, making payments during forbearance aligns with that mindset. It demonstrates a commitment to becoming debt-free and can help you develop good financial habits, such as budgeting and prioritizing debt repayment.
Remember, each person's financial situation is unique, and it's essential to weigh your options carefully. Consider seeking advice from a financial advisor or student loan expert to make the most informed decision regarding your student loans during forbearance.
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Interest accrual during forbearance
The treatment of interest during forbearance depends on the type of loan. For federal subsidized loans, interest does not accrue during the forbearance period. On the other hand, interest accrues on all other loans, including federal unsubsidized loans and private student loans. Borrowers with these loan types will see their interest compounded and added to the principal balance when the forbearance period ends, increasing the overall loan amount.
It is important to note that some private student loan servicers may offer the option to pay the accrued interest during forbearance, preventing it from being capitalized (added to the principal). This can help mitigate the long-term costs of interest capitalization. However, it is crucial for borrowers to carefully review their loan contracts and understand the applicable laws governing their private student loans, as terms and fees may vary across different servicers.
While forbearance can provide temporary financial relief, it is generally recommended to continue making payments whenever possible. This is especially true for borrowers with aggressive repayment goals. By continuing to make payments during forbearance, borrowers can ensure that their entire payment goes toward the principal balance, reducing the overall loan cost. Additionally, exploring alternative repayment plans or enrolling in deferment, if eligible, can provide further options for managing student loan debt.
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Forbearance for federal vs private loans
Forbearance is a temporary postponement or reduction of your student loan payments because you are experiencing financial difficulty. Forbearance works differently depending on whether you have a federal or private student loan.
Federal Loans
Forbearance for federal student loans is a federal program that allows you to temporarily pause or reduce your loan repayment. There are two types of forbearance: general and mandatory. General forbearance is when your student loan servicer decides whether or not to grant you forbearance, whereas mandatory forbearance is granted automatically if you meet certain criteria. All federal loans are eligible for general forbearance, which can be granted for up to 12 months at a time and can be extended if needed. Perkins Loans have a maximum limit of three years for general forbearance. Interest continues to accumulate during forbearance, and you may be responsible for paying this interest. However, for Direct Loans, interest will not be added to your principal balance. For other federal loans not owned by the Department of Education, interest may be added to your principal balance.
Private Loans
Private student loan forbearance varies and is generally more limited than federal forbearance. The terms and fees associated with postponing private student loan payments depend on your contract and applicable laws, and they may differ for each loan servicer. Some private lenders may offer their own versions of deferment or forbearance, such as allowing you to pause payments during a period of financial hardship or while returning to school. Before refinancing federal loans with a private lender, it is important to consider that you will lose the protections and programs offered by federal loans, including income-driven repayment plans and loan forgiveness.
Alternative Options
If you are struggling to make your monthly payments, there are alternative options to forbearance. One option is an income-driven repayment plan, which limits your monthly payments to a percentage of your discretionary income. After a certain number of on-time payments, your loans may qualify for forgiveness. Another option is to refinance your federal loans with a private lender, which could potentially lower your interest rate and reduce your monthly payments. However, refinancing with a private lender will result in the loss of certain protections and programs offered by the federal government.
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Applying for forbearance
For federal student loans, you can generally apply for forbearance by contacting your loan servicer, often over the phone. They may grant forbearance for up to 12 months at a time. It's important to continue making payments until your forbearance request is approved. During forbearance, interest will accrue on your loan, and you can choose to pay this interest or have it added to your loan balance when the forbearance period ends.
Private student loan forbearance varies and is typically more limited than federal loan forbearance. The terms and fees associated with postponing private student loan payments depend on your contract and applicable laws, and they may differ for each servicer. Contact your private student loan servicer as early as possible to discuss your options.
For mortgage forbearance, you need to contact your mortgage servicer or lender to request assistance. They may allow you to temporarily pause or reduce your mortgage payments for a specified number of months. However, you will still owe the full amount, and you will need to repay the missed or reduced payments later, which may result in an extension of your mortgage term. Some mortgage servicers have specific requirements for requesting forbearance, such as doing so within a certain timeframe after a qualifying event.
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Impact on credit score
Student loan forbearance is a temporary postponement or reduction of your student loan payments because you are experiencing financial difficulty. Forbearance works differently depending on whether you have a federal or private student loan. During the COVID-19 pandemic, an automatic government-initiated student loan forbearance was put in place, and this was not considered negative as far as the borrower's credit score is concerned. As long as the account remains in forbearance, the payment status on the credit report will continue as it did when the account was first placed into forbearance. Credit scores will not be penalized for non-payment during this time.
When an account is not in forbearance, making all loan payments on time will help build a strong credit history and boost credit scores. Conversely, missing payments will damage credit history and hurt credit scores. Late payments remain on a credit report for up to seven years. Therefore, it is important to contact the loan provider to discuss options if you are struggling to make payments or think you may miss a payment deadline.
During a period of forbearance, interest will not accrue on federal loans, meaning that any payments made will go directly towards the principal. This can help reduce the balance faster than if part of each payment was going towards interest.
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Frequently asked questions
Any payments made during forbearance will go directly to your principal, helping you reduce your balance faster.
No, you are not required to pay your student loans during forbearance. Forbearance is a temporary postponement of your student loan payments because you are experiencing financial difficulty.
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. Your credit scores will not be penalized for not making payments during this time.
Yes, if your situation changes and you are able to make payments toward your student loan, it may be wise to do so. The more you are able to pay down your loan now, the better position you will be in when the time comes to begin your repayment schedule again.
