Student loan forbearance is a loan repayment option made available to borrowers having difficulty making payments toward their loans. It allows for the borrower to greatly reduce the payment due, or to suspend any payment on a loan until a future date.
Forbearance is typically requested when a borrower is facing financial difficulty. Most commonly this is a result of lack of employment, a decrease in income, or illness or disability that prevents the borrower from working.
Important points about forbearance:
1. When a loan goes into forbearance, any accrued and unpaid interest is capitalized and added back into the total outstanding loan. A loan balance will continue to increase as long as the payments are suspended. In this way a forbearance does not make the loan “go away,” it’s just a temporary relief from having to make payments, but the loan will need to resume normal repayment at a future date. This can increase the total cost of loan repayment once normal payments resume.
2. Forbearance is provided as an alternative to regular monthly payments. A borrower may be able to make a partial payment on their loan each month that is lower than the minimum payment. For example, a borrower may be responsible for a $400 monthly payment, but can only afford $100 while they are searching for a new job. Making a $100 payment is better than making no payment at all, as some of the interest can be covered each month. The forbearance request will specify if you can make a partial payment or no payment on your loans.
3. Under forbearance, a lender agrees to halt required loan payments for a specific amount of time. Typically a single forbearance request can extend for six months, with an option to reapply and extend forbearance further. Most lenders can extend forbearance up to 18 months if continually approved for each six-month segment. Confirm your forbearance time frame directly with your lender.
4. Can forbearance affect your credit score? Forbearance is a better alternative to just missing payments. Because forbearance is not recorded as a missed payment due to an official arrangement made with your creditor, the information is not reported negatively on the credit score. However, a loan in forbearance will continue to grow by accumulating interest over time, and can have in impact on an individual’s debt-to-income ratio.
5. What should I do to apply? Every lender or creditor may follow different application requirements to process a forbearance. The application may ask for detailed information about employment history, alternative income sources, and living expenses and must be fully completed before formal review. If incomplete, a forbearance can be rejected. Be advised that a request for forbearance may take several business days to process before being approved or denied.
6. Avoid the last minute, but late is better than never. If a payment is due within just a few days, there is no guarantee a forbearance request will be processed in time to avoid that payment. A forbearance request should be submitted well in advance of an upcoming payment due to give enough time to be approved, or if denied it can be determined what additional information is required to move to approval. A forbearance request may be activated retroactively, so if a borrower has already missed some payments, they should submit the request ASAP so the lender can update repayment status. A retroactive approval can help to avoid a negative impact on the borrowers credit report.
7. Forbearance is basically a short-term cash-flow solution for borrowers under financial distress. The temporary relief is only offered to help the borrower get back on their feet, and is not meant to be a permanent solution.