With the way prices are rising right now, it can be hard to make your monthly loan payments. In situations of severe financial distress, you can pause your monthly payments with student loan forbearance. At least for a little bit, giving you time to regain financial stability so you can start making payments again. If you do find yourself in a situation of financial hardship, here’s everything you need to know about student loan forbearance.
What is a Student Loan Forbearance?
Student loan forbearance is the ability to temporarily not make payments on your student loans. Forbearance can come in handy in times of financial distress. However, this won’t help you make any progress on your student loans. So, there are both benefits and disadvantages to forbearance that you need to know about.
Pros of Student Loan Forbearance
First off, forbearance is a better option than other alternatives like garnishment and student loan default. Garnishment refers to money being withheld from your paychecks to be sent to a third party. Defaulting on your loans means that you haven’t made payments on them in nearly 9 months, which can affect your credit score. Forbearance doesn’t do either of these things.
Additionally, interest that you accrue while you are in forbearance is going to be at a lower rate than other options like a payday loan or a personal loan. Those tend to have higher interest rates. So, student loan forbearance is going to be more affordable for you.
Finally, if you are experiencing financial hardship, forbearance frees up your money. You can use that extra money for more pressing matters.
Cons of Student Loan Forbearance
As good as it can be in the short run, forbearance is not something you can keep up for too long without consequences. It could end up costing you more money than before. For instance, although you’ll get lower interest with forbearance, it capitalizes. Capitalizing interest means that any unpaid interest you accrue on your loan is added back to the loan principal. This in turn makes paying back your loans take longer than originally planned.
Also, repeatedly choosing to go into student loan forbearance for a loan can cause it to default. Student loan default can be a more difficult situation to be in, and missing too many student loan payments is damaging to your credit score. It’s another reason why you don’t want to rely on forbearance for long periods of time.
When to Request a Student Loan Forbearance
Because student loan forbearance is a temporary strategy, only a few people should use it. You want to look at it as a way to avoid a student loan default. If your situation matches all of the following, then you can request student loan forbearance:
- You can’t pay your loans.
- You don’t expect it to be long until you can start repayment again.
- You don’t qualify for deferment.
Is Student Loan Forbearance Bad?
Student loan forbearance isn’t necessarily bad. When compared to other alternatives like student loan default, it’s the better option. But, forbearance can have its consequences and become expensive if used for too long. It’s a last-resort solution that should only be used if you’re absolutely sure you need it and that you won’t need it for long.
Alternatives to Student Loan Forbearance
While forbearance can be helpful, there are some other options you’ll want to look at first, mainly deferment and income-driven repayment plans.
Deferment
Similar to student loan forbearance, deferment also pauses your student loan payments for a period of time. Normally, you can defer your payments for up to 3 years. Additionally, you might not get capitalized interest. So, you might not have to pay more than the original loan amount regardless of how long your loan is in deferment.
Income-Driven Repayment Plan
If you have federal student loans, you should consider an income-driven repayment plan. Income-Driven Repayment (IDR) plans base your monthly payment on a percentage of your income, so you may find the payments to be more affordable. Plus, there are different repayment options to choose from. So, you can choose the best plan for you.
Is Forbearance the Same as a Grace Period?
No. While you don’t have to make payments during either, they’re different concepts. Grace periods usually only occur after graduation, and they only last around 6 months on average. You might be able to get it extended to 9 months, but typically no longer than that.
A forbearance period, however, can last up to a year. You can get additional time depending on the type of loan you have.
Do Months in Forbearance Count Toward Forgiveness?
In order for a payment to count toward student loan forgiveness it must meet 3 requirements. It has to be on an eligible loan, an eligible repayment plan, and you must have an eligible employer. When you’re in forbearance, you’re not making any payments under an eligible repayment plan toward a loan at all. So, it won’t count toward student debt forgiveness.
Does Forbearance on Student Loans Affect Credit?
No. Student loan forbearance doesn’t directly affect your credit score. However, putting off your payments for too long can lead to you missing them, and missed payments do affect your credit score. That’s why you don’t want to be in forbearance for too long.
Final Thoughts from the Nest
Student loan forbearance is a temporary solution and is useful if implemented right. But don’t resort to using it as a long-term strategy. If you need more help, you can turn to Sparrow. Sparrow offers private student loan refinancing services that can help you make student loan repayment more manageable. So, just know that no matter what happens, we are always here to help.