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High student loan debt is a major problem for many people. The average student loan balance per borrower was $35,620 as of the second quarter (Q2) of 2019, according to Experian data.
That's a lot to owe, and the payments aren't always easy to make. In fact, 12% of federally managed student loans were in default as of Q3 2019, according to U.S. Department of Education data. Just over half of student loans are actively being repaid.
Before delinquency becomes default, many borrowers consider a loan forbearance, which provides a temporary reprieve on payments. Forbearance may provide some much-needed financial breathing room. Here's how to see if it might be right for you.
What Does Student Loan Forbearance Mean?
If you have federal student loans, such as direct loans, Federal Family Education Loans (FFEL) and Perkins loans that are in good standing, you may qualify for a forbearance. If you do, your payments may be lowered or suspended for a specified period of time. Interest, however, continues to accrue.
There are two broad types of loan forbearance:
- General: Qualifying reasons for acceptance include financial difficulties, overwhelming medical bills, unemployment and changes in income. As long as you meet the criteria, you may have up to 12 months to pay less than the amount you normally would or even nothing at all. If your circumstances don't improve after that time you can request another forbearance, but you can't delay payments forever. Forbearances on Perkins loans are restricted to three cumulative years, and servicers for direct loans and FFEL may also impose limits.
- Mandatory: There are circumstances when the loan servicer must accept your forbearance request. That happens when:
- Your student loan payments exceed 20% of your monthly gross income.
- You are enrolled in a medical or dental internship or residency program.
- You are serving in AmeriCorps or similar volunteer-based program.
- You are in a teaching position that qualifies you for student loan forgiveness.
- You qualify for the Department of Defense's loan repayment program or are in the National Guard.
What's the Difference Between Deferment and Forbearance?
The other way to postpone student loan payments is with a deferment. It works much the same way as a forbearance, but the biggest difference concerns interest.
If the loans are subsidized, the Education Department picks up the tab for the interest that accrues while you're enrolled in school at least half-time, for the grace period after leaving school and during a period of deferment.
If any portion of your student loans is subsidized, it's best to see if you can get a deferment before pursuing a forbearance.
Deferments for economic hardship can be tough to get, though. To qualify, you'll have to be receiving government assistance or be unemployed. If you're working, you'll need to demonstrate that your monthly income is less than 150% of the poverty guideline for your family's size and the state you live in. The rules for a forbearance aren't nearly as stringent.
How Does Forbearance Affect Credit?
In addition to providing a much-needed payment reduction or postponement, a forbearance can protect your credit rating. Your student loans continue to appear on your credit report, but would stay in positive standing.
While putting a loan in forbearance can prevent the extreme damage that late payments have on a credit score, it won't have any positive effect on your score because you aren't actively making on-time payments. For both your FICO® Score☉ and VantageScore®, payment history is the most important scoring factor. If a forbearance is the only way to make sure your credit report is clear of delinquencies, it can be a prudent decision.
Is Forbearance the Right Choice for You?
Although a forbearance has many merits, consider whether you really need one before taking that step. Remember, it's a temporary solution that's only appropriate for a short-term financial crisis. Because interest continues to accrue during forbearance, putting payments on ice will cause debt to grow rather than diminish. If you just need a break for a few months, the extra fees may not be so bad, but if you take a whole year off, it can cost a hefty sum. A 12-month forbearance will add $1,575 to the balance of a $35,000 student loan debt with a 4.5% interest rate, and increase the loan's monthly payment by $17.
Analyze your financial circumstances to determine if you can manage the payments as normal and avoid a forbearance:
- Reduce expenses. Review your budget carefully to see if there are any bills you can trim or eliminate that will make up for the student loan payment. If you can, make the changes and route the savings to your loan.
- Increase income. If you're already living close to the bone, explore ways you can realistically augment your income. You may be able to secure a part-time job, babysit, drive for a ride-hailing service or walk dogs. Make a goal to earn at least enough every month to pay your loan as normal.
- Sell unnecessary assets. Many people have valuable items around the home, garage or yard that they don't need or use. If you do, sell them and parcel out the proceeds to your loan on a monthly basis.
What Are the Alternatives to Student Loan Forbearance?
After exploring ways to free up money or add to your income, you may still come up short on funds. In that case, contact your student loan servicer and ask for help. They may work with you independently to let you pay less or nothing at all for a few months, without dinging your credit report. They may even shift you to an alternative payment plan. Keep in mind, they're not likely to do much to help you if your loans are already delinquent or in default.
The Education Department recognizes that a 10-year standard payoff time frame doesn't work for everyone. Thankfully there are other plans you can use to handle your student loans, and their payments can be far more affordable. For example:
- Graduated: Plans are still arranged for 10 years, but the payments start off small and then increase over time.
- Extended: You may have up to 25 years to send very small payments, which may be either fixed or graduated.
- Income-driven: These plans come in several varieties but all take into consideration the amount of money you make, your expenses, your family size and other financial factors. As your circumstances change, so, too, will your payments.
You can learn more about these plans and apply for the one that's right for you via StudentLoans.gov.
Loan forgiveness is yet another way to deal with expensive student loans. If you use a long-term income-driven payment plan and have a balance remaining at the end of 20 or 25 years, that portion of what you owe may be forgiven. You may also be able to have your loans forgiven with the Public Service Loan Forgiveness program. To be eligible, you'd need to work for a government or a qualified nonprofit for at least 10 years.
Bottom Line: Consider Your Options
After weighing all of your options for resolution, you may find that a student loan forbearance really is the best choice. If you go in that direction, use the months you have without the high payment wisely. Make changes to your financial affairs so you can get back to regular payments quickly.