Navigating the world of student loans can be daunting, especially when facing financial hardship. Forbearance is a term that often comes up in such contexts, but what does it mean, and how does it work? This article delves into the concept of forbearance, its types, and its implications for borrowers.
What is forbearance?
Forbearance is an option provided to borrowers allowing them to temporarily pause or reduce their student loan payments. It’s designed as a short-term solution during periods of financial difficulty. Federal student loan forbearance typically lasts for 12 months at a time and can be requested multiple times, though servicers may set limits.
Types of forbearance
There are two main types of federal student loan forbearance: general (discretionary) and mandatory.
- General Forbearance: This can be requested if you’re facing financial challenges such as medical expenses, job loss, or other difficulties. Approval is at the discretion of your loan servicer.
- Mandatory Forbearance: If you meet certain eligibility criteria, such as participating in a medical or dental internship, or if your student loan payments exceed 20% of your monthly gross income, you may be granted mandatory forbearance.
How does forbearance work?
When you’re granted forbearance, your payments are paused or reduced. However, interest continues to accrue on your loans during this period. At the end of forbearance, any unpaid interest may be capitalized, meaning it’s added to your loan balance, increasing the total amount you owe.
Requirements for a mandatory forbearance
This is unlike a general forbearance and must be granted by your loan servicer if you qualify or request it. Qualifications for receiving mandatory forbearance may include;
- Participating in a medical or dental internship or residency.
- Having student loan payments that exceed 20% of your monthly gross income.
- Serving in AmeriCorps.
- Performing service that will qualify you for Teacher Loan Forgiveness program.
- Serving in the National Guard, but not qualifying for military deferment.
To receive a mandatory forbearance, you’ll have to provide your servicer with the appropriate form and any necessary documentation, such as proof of your monthly income.
Pros and cons of forbearance
Forbearance can provide much-needed relief, but it’s not without drawbacks. Here are some pros and cons:
- Pros:
- Provides temporary relief during financial hardship.
- Prevents loans from going into default.
- Flexible: can be granted for various reasons.
- Cons:
- Interest continues to accrue, increasing the loan balance.
- Not a long-term solution for payment difficulties.
- Can lead to higher payments over the life of the loan.
Alternatives to forbearance
Before opting for forbearance, consider alternatives that might be more beneficial in the long run:
- Deferment: Similar to forbearance, but in some cases, you may not be responsible for paying the interest that accrues on certain types of loans during the deferment period.
- Income-Driven Repayment Plans: These plans adjust your monthly payments based on your income and family size, potentially making your payments more manageable over a longer term.
Will forbearance give you relief on your student loans?
Forbearance is a valuable tool for managing student loans during tough financial times. However, it’s crucial to understand its implications and consider all options before proceeding. Always consult with your loan servicer to make an informed decision that aligns with your financial goals and circumstances.
Remember, while forbearance can offer temporary relief, it’s not a cure-all. It’s essential to approach it as part of a broader financial strategy to ensure long-term stability and avoid accruing unnecessary debt.
