What Is Forbearance on a Student Loan?
Forbearance is an option for student loan holders facing serious financial problems stemming from unemployment, family crisis or other extenuating circumstances. Forbearance allows loan holders to either lower or stop payments during an approved time period, although interest charges are not forgiven. A loan holder who seeks forbearance must submit an application to the lender.
Other People Are Reading
-
Function
-
The bulk of student loans are issued by federal government entities such as Sallie Mae. Forbearance allows a student loan holder to lower, or in some cases, stop repayment to the lender for a specified time period. The loan holder must demonstrate financial hardship. In some cases, demonstrating family hardship will gain approval. A lender will typically grant forbearance request the outstanding loan balance is more than 20 percent of monthly income.
Time Frame
-
Forbearance is usually granted for one year with extensions up to three years, according to the Sallie Mae website. Keeping the forbearance period short, anywhere from three to six months, is recommended by loan companies. Shorter time periods will prevent a major balance increase.
-
Effects
-
Lower payments, which don't include interest, assist struggling loan holders during difficult financial times. However, interest is not forgiven during the forbearance period. It is added to the principal of the loan and results in higher monthly payments and total balance. Student loan lenders generate quarterly statements of accrued interest. Loan holders have the option to pay the quarterly interest charge.
Significance
-
Forbearance helps a student loan holder avoid asking for a deferment or defaulting. Loan holders need to think about default might affect their credit score, which is a key component when applying for future credit. Paying a student loan too quickly can lower a credit score, while postponing payments with forbearance will not have negative effects.
Prevention/Solution
-
State and federal programs exist that can wipe out up to 70 percent of student loans. These include enrolling for stints in the Peace Corps or AmeriCorps, according to the My Loans Consolidated website. Several states offer programs to education professionals and teachers to forgive a good portion student loan balances. Experts warn never to pay a student loan with a credit card as the interest rate is much higher.
-
References
Resources
- Photo Credit sign. loan sale image by L. Shat from Fotolia.com
