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Student Loan Forbearances: When, why, and should I?

Personal finance • April 27, 2020 • Jaymi Cook

What you’ll learn

  • What a student loan forbearance is
  • How student loan forbearances work
  • Different types of student loan forbearances
  • When you should use a student loan forbearance

You have student loans and you are making payments every month but then it happens, you run into some trouble. Take something like COVID-19, for example, an unforeseen event that affects us all. It might mean you are out of work and looking for any help to make ends meet. You are reviewing every bill and trying to decide how you are going to pay and if you can postpone payments.

Fortunately, most lenders have programs in place to help customers when they run into financial difficulty. Often, that assistance comes in the form of a “forbearance.”

What is a student loan forbearance?

So, what is a student loan forbearance, and what does it mean for you?

First, it’s helpful to understand the terminology. Simply put, a forbearance allows you to postpone payments for a set period of time. The amount of time allowed depends upon your lender and your personal situation. A forbearance can be 30, 60, or even 90 days.

How does it work?

With a forbearance, your loan payment may be postponed for a set timeframe, but the interest continues to accrue. Generally, at the end of the forbearance period, the accrued interest is capitalized, which means it’s added to your principal balance. That means a forbearance allows you to postpone a payment now, but you will owe that payment – and more – when the forbearance is over.

Are there different types of student loan forbearances?

Your lender may offer different types of student loan forbearances, depending upon your situation. A hardship forbearance, in which the interest capitalizes at the end of the forbearance period, is usually the most common. However, your lender may have other forbearances, such as those given during natural disasters or pandemics like COVID-19. Generally, the interest does not capitalize for a disaster forbearance.

When should I use a student loan forbearance?

Using a forbearance for a loan payment will generally increase the cost of your loan in the end, so you may want to exhaust all available options before you request one. If you have a cosigner for your loan, check with them to see if they can help you make your payment, or contact your lender to see if they have a payment plan that will reduce your monthly payment to something you can afford.

What are the potential drawbacks of a student loan forbearance?

If the interest on your loan capitalizes at the end of your forbearance period, that means it is added to your principal balance. This means your loan will cost you more to repay because you’ve increased the amount on which you are paying interest going forward. In addition, your loan payment may go up once the forbearance ends because you are not extending the term of your loan, meaning you’re repaying more money in the same period of time. Before taking a forbearance, you will want to consider what you can afford to pay after the forbearance period ends, as it will usually be more than what you are paying now.

Is a student loan forbearance right for me?

Of course, we all know it’s always better to make our loan payments each month or even pay a little extra, if possible. The more you pay toward your loan on a monthly basis, the faster you can pay it off and the less it will cost you overall.

However, if you run into difficulty making payments, a forbearance can provide much-needed help in times of personal or financial hardship. That said, it’s important to understand how they work and how they affect your loan and future payments.

If you find yourself needing assistance repaying your loan, call your lender to discuss your options.

Jaymi Cook is a Sallie Mae employee and is seeking her master’s degree from The Johns Hopkins University. When she’s not cheering on her favorite football team, she’s riding or racing around the Delaware Valley on one of her many bicycles.

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