Student loan forbearance is a loan repayment option made available to borrowers having difficulty making their regularly scheduled loan payments. Forbearance generally allows for the borrower to reduce the payment amount due or to suspend payments 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 a loss 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 may be capitalized and added to the total outstanding loan balance.
Interest may continue to accrue, and the loan balance will continue to increase as long as the payments are suspended. Thus, forbearance does not make the loan “go away”; it’s just a temporary relief from having to make regularly scheduled payments, and the loan will need to resume normal repayment at a future date. Once the forbearance period ends, the accrued/unpaid interest may be capitalized, which can increase the monthly payment amount due and 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 paid down each month. The forbearance terms 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 up to 6 months, with an option to reapply and extend forbearance further if the lender or servicer deems you eligible after considering your financial situation. Confirm your forbearance time frame directly with your lender or servicer.
4. Can forbearance affect my credit score?
Forbearance is a better alternative to missing payments that are due on your loan. Because forbearance is not recorded as a missed payment due to an official arrangement made with your lender, the forbearance does not negatively impact your credit score. However, a loan in forbearance will generally continue to grow by accumulating interest over time and can have an impact on an individual’s debt-to-income ratio.
5. What should I do to apply?
Every lender may have different application requirements to process a forbearance request. The application may ask for detailed information about employment history, alternative income sources, and living expenses, and it must be fully completed before formal review. If incomplete, a forbearance request 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. In some cases, 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 or servicer can update repayment status.
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.