What Does Forbearance Mean?

Here are things you need to know about forbearance

Flickr user Pete B.

Forbearance is a special type of program that gives students temporary relief from making their loan payments. This is a great alternative for students if money is tight and they cannot afford to make their scheduled loan payments.

Unlike when you defer your student loans, where the outstanding payment does not accrue any interest, under forbearance the interest continues to accrue during the entire period of forbearance.

Important Things To Know About Forbearance

Forbearance is temporary. When your forbearance ends, you will need to start making payments again.

You are responsible for any interest that accrues, regardless of the type of loan. After the agreed-upon term is completed, all unpaid interest is added to the amount you borrowed, which in effect increases the loan amount and generates more interest.

The benefit of forbearance is that it postpones the repayment of your loan, giving you some more time to build up your finances and make new student loan payment arrangements.

The downside is that it increases the overall cost of your loan. You have the option of making payments during the forbearance period, which can help to limit the amount.

Should You Apply For Forbearance If You Are In Financial Distress?

Forbearance is definitely a better alternative than defaulting if you find yourself in a tight financial situation. However, considering that you will end up paying a significantly higher amount in the end, you must think about it carefully or else you could find yourself in a worse financial position than before.

Ask yourself these questions to determine whether forbearance is the right solution for you:

Are you experiencing a temporary financial setback or is it likely to be a long-term problem? – An accident or family emergency can throw your budget into a tailspin for a while but you know that you will be able to get back on course in the foreseeable future. Forbearance can come as a welcome relief at a time like this. However, if you cannot seem to find a job that pays enough, forbearance will only push you further in debt. In this case, it may be better to consider an alternative repayment option such as a graduated repayment or an income-based repayment.

Are there any other items in your budget that you can sacrifice in the interim period? – Think of forbearance as a last-ditch effort. Only consider it if you have explored all other options. Do you really need to buy that brand new car? Sure, you’ve been dreaming about owning your very own car for years but is it worth the extra loan amount you will be saddled with? It makes more financial sense to settle for a used vehicle, or better still, public transportation will your student loans are completely paid up.

Types Of Forbearance Programs

There are two types of forbearance programs—mandatory and discretionary.

You are eligible for mandatory forbearance if you are in a medical or dental internship or residency or you are in the process of qualifying for teacher loan forgiveness.

If you want to put your loan payments on hold for a while but are not eligible for mandatory forbearance, you can request a discretionary forbearance. Getting approval under this program is at the lender’s discretion. In most cases they do approve.

In both cases, the interest will accrue so you must think about it carefully before exercising this option.

Ideally, if you are in financial distress and are unable to make your stipulated loan repayments, you should first explore your deferment options. You should consider forbearance only if you do not meet the requirements for deferment.

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College Raptor Staff

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