What is student loan forbearance? Will it hurt credit? [2021 Update]

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If you’re struggling financially, forbearance allows you to temporarily stop making payments or to make reduced payments on your student loans.

In order to be approved for forbearance, you must meet certain criteria, including applying before your student loan defaults.

What are the consequences of defaulting on a student loan? If you default on your student loans, the entire remaining balance is due. This is called “acceleration.” Defaulting also hurts your credit — which is just one reason to avoid it if you can.

Additionally, defaulting means you’ll lose eligibility for forbearance, deferment, other repayment plans, and forgiveness on your student loans. You’ll no longer be able to receive further federal student aid.

However, defaulting does mean you could negotiate a student loan debt settlement. Read more about that here.

This article covers everything you need to know about student loan forbearance. I’ll even talk about how COVID affects forbearance.

Federal Loan vs. Private Loan Forbearance

Student loan forbearance is different depending on who owns the loans. The 2 basic types of student loans are:

  1. Private student loans
  2. Federal student loans

Private loan forbearance

Banks and institutions give out private student loans just like any other loans. Generally, they make the rules about what you’re able to do, like student loan deferment and forbearance.

Some private lenders offer forbearance, but it’s really up to the individual lender. Instead, they may work out some other payment plan like income-driven repayment or interest-only repayment.

Federal loan forbearance

All federal student loans offer forbearance, but it’s not guaranteed.

You need to submit a request to your student loan servicer, as well as documentation to show that you meet the eligibility requirements for forbearance.

How do federally-owned student loans work? The U.S. Department of Education issues federal student loans through the William D. Ford Federal Direct Loan (Direct Loan) Program.

A loan servicer then handles the repayment process of your federal student loans. They’ll facilitate your payments and work with you if you need forbearance, deferment, or a special repayment plan.

What happens to interest after forbearance?

Unlike deferment (during which no interest accrues), the interest on your student loans will not stop during forbearance. That unpaid interest continues to build up throughout your forbearance period.

Typically, federal student loans don’t provide interest-only repayment plans. However, during forbearance, you can elect to make interest-only payments to prevent it from building up during your forbearance.

When your forbearance ends, all of that unpaid loan interest is capitalized, meaning it’s added to your principal loan balance. This applies to Direct Loans and Federal Family Education Loans (FFEL Program loans) only. Interest is never capitalized on Federal Perkins Loans.

What is the average interest rate on federally owned student loans? Average interest rates on federal student loans range from 2.75% to 5.3%. It all depends on what kind of federal loan you get, when you took disbursement, and whether you opted for a fixed rate or a variable rate.

Is there a limit to the amount of time a student loan can be in forbearance? Yes, forbearance on a student loan lasts for a maximum of 12 months at a time. However, if you’re still having financial trouble when your forbearance ends, you can request another forbearance.

There’s a cumulative limit on forbearances of 3 years throughout the life of the loan.

The pros and cons of student loan forbearance

Why is it necessary to forbear on student loans? You may need to forbear on your student loans to stay out of serious financial trouble. Forbearance is a better option than not paying at all and going into default.

While forbearance is an excellent tool for student loan borrowers who need help, it may not always be the best option for everyone.

Weighing the benefits against the downsides should help you choose if forbearance is the best option for you.

Pros of forbearance

  • It helps you avoid delinquency, default, and collections.
  • It doesn’t impact your credit score.
  • It frees up your monthly budget to pay expenses.
  • It allows you time to consider other options like consolidation, income-driven repayment, or refinancing.

Cons of forbearance

  • It can be expensive. When forbearance ends, your balance will be much higher, making your monthly payment higher.
  • You may not qualify or meet your lender’s requirements.
  • It’s not a long-term solution. You’ll need to start making payments once forbearance ends, regardless of whether or not your situation has improved.
  • Forbearance doesn’t count towards Public Service Loan Forgiveness.
  • If you want to negotiate a student loan settlement, you need to be in default — which will tank your credit, but can lead to long-term benefits.

COVID-19 emergency forbearance

The COVID-19 pandemic has been rough on us all. The federal government passed legislation that provides temporary relief from the effects of the coronavirus pandemic for a lot of people, student loan borrowers included.

In 2020, Congress passed the $2.2 trillion CARES Act. That bill suspended monthly payments for most federal student loans. This means that forbearance is automatically applied to your loans without having to apply and show proof of financial hardship.

When President Biden entered the White House, he extended the automatic forbearance until September 30. The White House hasn’t made clear whether he will extend the automatic forbearance or not.

The Department of Education has a guide to ensure that you’re ready when federal student loan payments resume:

  • Verify your contact information on your loan servicer’s website and your studentaid.gov profile is correct.
  • Utilize the loan simulator tool on studentaid.gov to find repayment options that fit your situation or to consider whether or not to consolidate.
  • Consider applying for an income-driven repayment plan (IBR), which can make your payments more affordable.

What is the interest rate on federally owned student loans during the COVID-19 pandemic? During the COVID-19 pandemic, the interest rate on federal loans has been reduced to 0%. This means no interest will accrue and capitalize on your loan balance.

When will interest and monthly payments on federally-held student loans resume? At the moment, payments and interest will resume on October 1. President Biden hasn’t announced any extension to the September 30 cutoff.

According to the Department of Education’s website, you’ll receive your billing statement or other notice at least 21 days before your first payment is due when the forbearance period ends.

What are the eligibility requirements for COVID-19 pandemic student loan forbearance? All federal student loans that entered repayment prior to the payment suspension period are eligible, even defaulted student loans.

Eligible loans include:

  • Defaulted and non-defaulted Direct Loans
  • Defaulted and non-defaulted FFEL Program
  • Defaulted FFEL Program loans
  • Defaulted and non-defaulted Federal Perkins Loans
  • Defaulted HEAL loans

Some FFEL loans can be owned by commercial lenders, and some Perkins loans are owned by the university or college you attended. You’ll need to work with your lender or school to see what options you have in those cases.

Pro tip: If you decided to make optional payments on your student loans during the pandemic, you could request a refund of everything you’ve paid since March 13, 2020. Studentaid.gov says, “Contact your loan servicer to request that your payment be refunded.”

Type 1: General Forbearance

General forbearance (AKA “voluntary forbearance” or “discretionary forbearance”) is granted by your loan servicer based on your application and the information you provide.

You can request forbearance if you’ve experienced financial hardship, including:

  • Financial difficulties
  • Medical expenses
  • Change in employment
  • Other reasons accepted by your loan servicer

You can get general forbearance if you have Direct Loans, Federal Family Education (FFEL) Program loans, and/or Perkins Loans.

The duration of general forbearance is 12 months. If your financial struggles continue after 12 months, you can reapply. However, there is a cumulative limit of 3 years (36 months) on the amount of general forbearance you can get.

Type 2: Mandatory Forbearance

If you meet certain criteria, you could be eligible for a mandatory forbearance. Since it’s mandatory, your loan servicer is required to grant you forbearance.

Only Direct Loans and FFEL Program loans can get mandatory forbearance.

You can get mandatory administrative forbearance if you meet any one of the following scenarios:

  • AmeriCorps — you are serving in the AmeriCorps position and have received a national service award
  • Department of Defense Student Loan Repayment Program — you’re eligible for partial repayment through the U.S. Department of Defense Student Loan Repayment Program
  • Medical or Dental Internship or Residency — you’re currently enrolled in a medical or dental internship or residency program
  • National Guard Duty — you are a National Guard member and have been activated by a governor but aren’t eligible for military deferment
  • Student Loan Debt Burden — if the total amount owed each month for all the federal student loans you received is 20% or more of your total monthly gross income for up to 3 years (This applies to Direct Loans, FFEL Program loans, and Perkins Loans.)

Forbearance and Public Service Loan Forgiveness

If you’re on track to receive Public Service Loan Forgiveness (PSLF), forbearance will hinder your chances of achieving it sooner.

When you go into forbearance on a federal student loan, the time spent in forbearance doesn’t count towards your progress needed to qualify for PSLF.

You also won’t lose any past progress you made. Instead, you’ll pick up right where you left off when you resume making monthly payments.

Like everything else with the COVID-19 pandemic, this too has changed. Automatic forbearance during COVID does count towards PSLF.

In the case of COVID, you must have a Direct Loan and work full-time for a qualifying employer during the automatic suspension for it to count towards PSLF. You must submit a PSLF form that certifies you were employed for the same period of time as the automatic suspension.

Student Loan Forbearance Takeaways

Forbearance can be a great many people. However, whether forbearance is right for you depends on your current financial situation and your future goals.

Forbearance may be a good fit for you if:

  • You’ve lost your job or are facing substantial financial hardship.
  • You can qualify for either general forbearance or mandatory forbearance.
  • Your financial hardship is temporary, and you’ll be making money soon.
  • You’re not worried about paying more over time.

It might not be the best option if:

  • Your situation will last longer than 12 months.
  • You’re still making money and could qualify for income-driven payment plans.
  • Your loans are already in default.

You want to look into the alternatives to forbearance. By weighing each, you can better decide what is best for you. Alternatives include:

If you’ve defaulted on your student loans, you’re no longer eligible for forbearance. However, you can do either of the following:

Ready to change your student loan situation?

Listen, if you’re considering student loan forbearance, something isn’t right with your finances.

Luckily, I’ve seen it all. I want to work with you and help find a path for you moving forward. Maybe forbearance is the right answer; maybe there’s something else we can do that better.

First, let’s talk. Schedule a free 10-minute call with me today. We can go over your options and how I can help you sort out your entire student loan situation.

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I'm a student loan lawyer that helps people like you with their federal and private student loans wherever they live.

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