Student loan forbearance can feel like a lifeline when you’re struggling to make ends meet. It’s a formal agreement with your loan servicer to pause payments, designed to help you avoid loan default during a short-term financial hardship.
However, it’s a tool that comes with significant costs. Understanding how forbearance works, particularly how interest accrues, is essential to prevent a temporary solution from turning into a long-term financial burden.
The Forbearance Process
Forbearance is not automatic; you must request it from your student loan servicer. Simply stopping payments will lead to delinquency and damage your credit.
The process generally involves these steps:
- Contact Your Loan Servicer: You must formally request forbearance. You can typically do this online through your servicer’s portal or by calling them.
- State Your Hardship: You will need to explain why you cannot make your payments. Depending on the type of forbearance, you may need to provide documents proving your situation.
- Receive Approval: If you qualify, your servicer will grant the forbearance for a specific period, usually up to 12 months.
- Interest Accrues: This is the most critical rule of forbearance. Interest continues to accumulate daily on your entire loan balance.
- Interest Is Capitalized: At the end of the forbearance period, the unpaid interest that accrued is added to your principal loan balance. This means you will begin paying interest on a larger amount, which increases your total repayment cost.
Types of Forbearance: General and Mandatory
There are two main categories of forbearance, which determine whether your servicer has a choice in approving your request.
General Forbearance
Also known as discretionary forbearance, this is the most common type. Your servicer can decide whether to grant it based on your circumstances. Common reasons include temporary financial difficulties, job loss, or high medical bills. Servicers can grant general forbearance for up to 12 months at a time, with a cumulative limit of 36 months.
Mandatory Forbearance
In specific situations, your loan servicer must grant forbearance if you meet the eligibility criteria and provide the required documentation. According to the U.S. Department of Education, you qualify for mandatory forbearance if:
- You are in a medical or dental internship or residency.
- Your student loan debt burden is 20% or more of your total monthly gross income.
- You are serving in an AmeriCorps position.
- You are performing service that qualifies for Teacher Loan Forgiveness.
- You are a member of the National Guard and have been activated, but you do not qualify for a military deferment.
Forbearance vs. Deferment: Key Differences
Forbearance and deferment both allow you to pause payments, but they treat interest differently. For borrowers with subsidized federal loans, a student loan deferment is almost always a better option because the government pays the interest on those loans during the deferment period.
| Feature | Forbearance | Deferment |
|---|---|---|
| Interest on Subsidized Loans | You pay the interest. | The U.S. government pays the interest. |
| Interest on Unsubsidized Loans | You pay the interest. | You pay the interest. |
| Primary Eligibility | Financial hardship. | Specific events (e.g., in-school, unemployment). |
| Financial Impact | Always increases the total loan cost. | May not increase cost if you have subsidized loans. |
The High Cost of Interest Capitalization
Capitalization is what makes forbearance expensive. For example, imagine you have a $30,000 loan with a 5% interest rate. You enter forbearance for 12 months.
- Interest Accrued: Over that year, your loan accumulates $1,500 in interest ($30,000 x 0.05).
- Capitalization: When forbearance ends, this $1,500 is added to your principal.
- New Principal Balance: Your new balance is $31,500.
Going forward, you’ll pay 5% interest on $31,500, not the original $30,000. You are now paying interest on top of your old interest.
When to Consider Forbearance
Forbearance should be a last resort after exploring other options. Before applying, check if you qualify for deferment or an Income-Driven Repayment (IDR) plan. An IDR plan adjusts your monthly payment based on your income and can be as low as $0, often providing a more sustainable, long-term solution.
However, forbearance can be the right choice if:
- You do not qualify for deferment.
- You need immediate, short-term relief while you apply for an IDR plan.
- You are facing a temporary financial crisis and expect your income to recover quickly.
External Resources:
For more detailed information, visit the official federal resource on forbearance at StudentAid.gov.
FinHelp.io is not a financial advisor. This article is for educational purposes only.