What is Forbearance?
Forbearance is an agreement between a borrower and a lender where the lender allows the borrower to postpone payments on debt temporarily.
A borrower might ask for forbearance if they are unable to make payments on their debt. Often these come as a result of financial hardship such as a job loss or illness. Forbearance is common in the context of mortgages and federal student loans. In the case of a mortgage, the loan servicer agrees that the homeowner can temporarily reduce or stop their monthly payments. The lender agrees not to pursue foreclosure proceedings during this time. Student loan lenders might also allow a borrower to enter into forbearance if their current income does not allow them to make their full monthly payment. However, those with student loan debt could opt for a deferment instead (similar to forbearance, but with the option to avoid interest).
Forbearance is like a highway rest stop…
As you’re driving down the highway toward your destination, you might run into problems and have to pull over at your local rest stop. Maybe you’ve run out of gas or have a flat tire. But eventually you’ll have to get back on the road to reach your final destination. Forbearance works that way too — You can take a short-term break from paying your debt, but eventually, you’ll have to start making payments again to reach your final destination of paying off that loan.
How does forbearance work?
When you go into forbearance, your lender agrees to pause your monthly payments for a specified period of time (often one year). Forbearance is a way for those facing financial hardship, such as a job loss or medical crisis, to avoid going into default on their loans. In some cases, such as with certain mortgages, forbearance might result in a reduction in the payment amount rather than a complete suspension of your payments.
During the time of forbearance, your loan will continue to accrue interest. That amount adds to your loan balance. After the forbearance period ends, you’ll have to resume your payments. For some mortgage forbearances, you might have to pay back the entire amount you would have paid during the forbearance. In other cases, the forbearance extends the life of your loan to make up for the time you weren’t making monthly payments.
Is forbearance bad for your credit?
Forbearance generally should not affect your credit score. In the long run, going into forbearance might actually be better for your credit score. Your payment history makes up 35% of the calculation to determine your credit score.
If you have a late payment on your student loans, this is a mark against your credit report and could have a sizeable impact on your score. When you go into forbearance, your loans are not in repayment. Therefore, your payments aren’t late.
If you’re worried you might not be able to keep up with your payments, forbearance might help you avoid a late payment that would impact your credit score.
What is student loan forbearance?
A forbearance is an option that many graduates use when they are unable to keep up with their federal student loan payments. Student loan forbearance often lasts for 12 months and allows borrowers to pause making payments on their debt during that time. Many people take advantage of this popular form of financial relief. As of 2020, 2.6M people currently have a student loan in forbearance.
What is the difference between student loan forbearance and deferment?
Student loan forbearance and student loan deferment are two terms that some people use interchangeably. And while they are very similar, there are slight differences.
You can usually get a forbearance for up to 12 months, but there’s no qualifying event necessary. You don’t have to be in school or have lost a job that prevents you from paying. However, it’s important to note that while you are in forbearance, your federal loans will accrue interest. The interest that accrues will then capitalize (that is, be added to your principal). You can get around this capitalization by continuing to make payments on your interest during your forbearance.
In most cases, it’s up to your lender whether or not to grant forbearance. However, some situations trigger mandatory forbearance, meaning your lender has to allow it. Those qualifying circumstances include serving in a medical or dental residency program, serving in Americorps or the National Guard, or having a student loan payment that is equal to 20% or more of your monthly gross income.
Deferment works a little differently. Like forbearance, deferment allows you to temporarily take a break from making payments on your federal student loans. Unlike forbearance, deferment may allow you to postpone these payments for years at a time.
The requirements for getting deferment are different than getting a forbearance. For a deferment, you’ll have to have some sort of qualifying event to be eligible. Qualifying events include:
- You’re experiencing economic hardship. The definition of financial hardship is set forth by federal regulations and includes receiving public assistance or having an income lower than the federal minimum wage rate or 150% of the poverty line
- You’re serving in the Peace Corps
- You’re serving on active duty in the military (or have been on active duty within the last 13 months)
- You’re unemployed or haven’t been able to find a job
- You’re enrolled at least half-time in postsecondary school (meaning anything after high school)
- You’re enrolled in graduate school
- You’re disabled and participating in rehabilitation training
The big selling point for deferment over forbearance is that if you have a subsidized loan, it will not accrue interest during a deferment period. For that reason, anyone with subsidized loans would be wise to try for deferment first.
For both deferment and forbearance, your loan cannot be in default — You have to have been making all of your scheduled payments on-time. For this reason, it’s best not to wait until you’re already behind on your student loan payments to seek financial relief. If you know you won’t be able to keep up with your payments, make the request while you still can.
If you are seeking Public Service Loan Forgiveness (PSLF is a federal program that forgives the remaining student loan balance of those who have worked in public service for ten years while paying their loans), think your decision through carefully. The PSLF program requires that you make 120 payments on your student loans while working in public service. The months you are in forbearance and not making payments on your loans will extend the amount of time before you can receive loan forgiveness. If you’re seeking loan forgiveness and struggling to make your payments, it might make more sense to attempt to lower your monthly payment through an income-driven repayment plan.
Should I get a forbearance?
Deciding whether to go into forbearance on your mortgage or student loan is a big decision. There’s a lot to consider. In the case of mortgage forbearance, your lender might allow you to pause payments for six months and then restart the payments after that time. But they also might require that you pay back all of those payments at once when the forbearance ends. For someone with financial hardship, this might not be realistic. Be sure you understand the terms of your forbearance before you agree to it.
For both mortgage and student loan forbearance, your loan will continue to accrue interest in the time you aren’t making your payments. This accrual of interest could add a huge amount of money to your balance. For someone with a student loan of $40,000 and an interest rate of 6%, you’re looking at an extra $2,400 going onto your balance over the year. For a mortgage with a balance of $150,000 and an interest rate of 3%, you’re looking at an extra $4,500.
How can I apply for forbearance?
If you feel like you need forbearance, talk to your lender. For mortgage forbearance, reach out to your mortgage lender and explain the situation. Ask them if forbearance is an option for you. The process might look different from one lender to the next. They may ask you to prove that you are unable to make the payments because of financial hardship.
If forbearance is not an option, your lender might suggest a payment modification instead, where they will temporarily reduce your mortgage payments for a specified amount of time.
For student loan forbearance, you also apply with your lender. Depending on your situation, you might have to submit documents to prove your status if you’re a student, facing economic hardship, or any of the other qualifying factors.
Continue to make your student loan payments until you know for sure the lender has approved the forbearance. Failure to make payments until that point will show up as a missed payment on your credit report, and may result in a denial of your forbearance request.