Life After College: Your Forbearance Options
Avoid Student Loan Delinquency
Student loan lenders (the U. S. Department of Education and the private market) provide a variety of repayment programs tailored to a new graduate’s changing financial circumstances. It is in a lender’s best interest to help you pay what you owe, but you should know there is generally a difference in flexibility between federal and private lenders. Since federal student loans are not for profit, you’ll receive more assistance in making changes to their terms of repayment as compared to the options a private lender will offer if you have trouble repaying as agreed.
If you experience difficulties in repaying your student loan debt, your first move should be to discuss a new repayment plan with your loan servicer. If that attempt fails, the two main avenues of relief are deferment and forbearance, which are periods during which you are not required to make regular loan payments.
Forbearance Of Federal Student Loans
The following information covers the federal guidelines for forbearance, because while the concept of forbearance in the lending industry is always the same, each private lender makes its own rules with regard to how forbearance is applied. The federal government farms out its student loans to different loan servicers, but the federal rules will always be used in determining how your forbearance works.
Forbearance involves reducing the amount of or ceasing your monthly loan payments for up to a year while interest continues to accrue. Because of that interest provision, which makes your loan more expensive, forbearance is considered less attractive than deferment, which is the other means of temporarily suspending loan payments.
The two types of forbearances are discretionary (your lender may or may not grant your request for forbearance) and mandatory (your lender must grant such a request). Ask your loan servicer how to submit a request, and be aware documentation of your stated reasons is usually required.
You may ask for a discretionary forbearance if your ability to pay is temporarily lessened due to illness or financial straits. But if you meet the criteria for a mandatory forbearance, you will receive it. Here is an outline of the basic standards you must meet for mandatory forbearance:
- You are working in a residency or internship as a medical or dental student.
- Your monthly student loan payments, added together, equal at least 20% of your gross income.
- You have received an award for your work and are still participating in a program sponsored by the Corporation for National and Community Service, such as Americorps.
- Your employment as a teacher would qualify you for forgiveness of those loans related to teaching.
- You would qualify for the partial loan repayment offered in the U.S. Department of Defense Student Loan Repayment Program.
- You are a member of the National Guard currently in active status, but you do not qualify for a military deferment.
The primary reason to avoid requesting a forbearance is expense. If you do not pay at least the interest on your loan, it may be added to the balance of your loan, meaning it also draws interest.
Seeking Forbearance From A Private Lender
As noted above, every private lender sets its own terms for granting forbearances. Oddly, most lenders do not provide a great deal of information about exactly how they decide to approve or decline customer requests for forbearance, so this is one point you should be certain to clarify with your lender before choosing a private loan.
One example is Wells Fargo, which explains what forbearance means and gives links to its two forbearance forms without any further statement. Those two forms are for the two types of forbearance Wells Fargo offers, one for students who are in school, or in a residency, internship, or fellowship and the other for students taking the in-school forbearance who want to extend that forbearance to summer breaks.
Bank of America and Sallie Mae mention the topic of forbearance, but shy away from providing any substantive information on their policies. Citizens Bank is more accommodating, posting general information about federal forbearance requirements, but avoids discussing forbearance in its documentation on its student loan product.
Other Ways To Delay Student Loan Payments
The most common of the other methods is deferment, which is very similar to a forbearance. In federal student lending, deferment also means you do not have to pay either principal or interest on your loan for a stated period of time, and also for certain types of loans (Perkins, Direct Subsidized, and old subsidized Stafford loans) the government will pay the interest for you. That is a distinct advantage of deferment over forbearance if you have one of those three loan types.
There is a chart detailing eligibility for federal deferment available here.
Less Common Methods
There are other, less common options for putting off student loan payments, including bankruptcy, cancellation, discharge, and forgiveness. Bankruptcy may not help you erase student loan debt, although even if that is the case it may help you pay off your student loans because your other debts are resolved. Cancellation can help you terminate a Perkins loan obligation in exchange for public service, including a teaching stint.
Discharge applies to extreme situations, such as disability, death, or some problem with your school. For example, if your school closes before you finish the term for which you borrowed money, or fraudulently certifies your loan eligibility, you may receive a discharge. Loan forgiveness is a more benign option, in which another entity pays the debt on your behalf in exchange for service.