April 15, 2021

What Does Forbearance Mean In Regards To Student Loans?

Chipper Help

Want to hear a joke?

What’s an easy way to ditch retirement planning?

Simple. Fall into a pit of student loan debt so that you don’t have to retire.

We figured you’d appreciate the joke’s levity. In truth, student loans can be an added pressure to studying, buying a house, raising a family, and retiring. Simply put, they can make your life even more challenging than your college organic chemistry class.

Yes, loans of any kind (like student loans) can place an unbearably heavy financial burden on your shoulders. Be that as it may, there is some good news. There is something you can do to make your payments manageable.

You can opt for a student loan forbearance. If you want to know more, stick around!

What Does Forbearance Mean?

Before we talk about student loan forbearance, you need to know what forbearance is.

We know that banks and lenders warn people of home foreclosure for missing monthly mortgage payments. Sure, missing one monthly payment may not be a big deal. However, with COVID and its economic aftershocks, you may be falling behind due to financial difficulties. And, these difficulties may go on for far longer than a month.

This can lead lenders to one option — foreclosure. Of course, this is no bueno. When it comes to student loans, your loan may be put in default. Also not a good position to be in.

What if you’re sure that you can pay for arrears in full, just not at the moment? What if you can guarantee this with your lender in order to put off foreclosure?

This is where forbearance comes in.

Forbearance is a sort of financial arrangement you can have with your lender to put off the date of foreclosure or loan default — even after missing payments. Forbearance allows you to temporarily stop paying a loan or mortgage.

With forbearance, you can pay the principal amount of your loan or mortgage at a later date. In most cases, you can expect a leeway of six to 12 months.

Although you halt payments for a certain time, interest still accrues. So, when you pay at the agreed time, it will be the total principal amount along with interest added.

Student Loan Forbearance

Take the general idea of a mortgage forbearance, and apply it to your student loan.

A student loan forbearance can allow you to temporarily stop paying your loan. As mentioned earlier, for student loans, the period is up to 12 months.

This may sound great at first blush. However, do keep the following in mind:

You Can Take It Easy On The Payment, Not The Interest

Student loans forbearance allows people to do one of two things:

  • Temporarily cease paying monthly loan installments for up to 12 months
  • Pay a lower amount monthly than the original set installment

Either way, if you are on student loan forbearance, you need to pay in full as soon as the forbearance agreement expires.

Here is something to consider, though.

Whichever option you choose, you still need to pay interest. Interest also continues to accrue for each month you don’t pay during the forbearance period.

A Student Loan Forbearance and a Student Loan Deferment Are Two VERY Different Things!

With a student loan forbearance, you still need to pay for the interest, as mentioned.

With student loan deferment, things are nearly identical. You can pay your installments at a later time and the amount you will pay is the sum of all the months you missed on the deferment.

Here is the part that isn’t the same. Interest.

With a student loan deferment, you only pay the sum of the principal amount. Not the interest.

With forbearance, you pay both. Ouch!

Hence, it’s pretty clear that student loan deferment ought to be your first option. However, it isn’t exactly the easiest thing to apply for.

COVID-19 Isn’t All Bad… For Student Loans Anyway

Luckily, the Federal Government is on your side. They’ve announced a stimulus package meant to help the American economy during these trying times.

The HEROES Act had several provisions for economic aid and recovery. Luckily for you, one of the provisions included is student loan administrative forbearance. Here are some of the contents of the HEROES Act that might interest you:

Your Loans Are “On Hold” Until September 30, 2021

If you have a Federal student loan, here’s some good news.

The Federal government has announced a forbearance on all federally-owned student loans. And, forbearance will last until September 30, 2021.

0% Interest!

Yes, it almost sounds like an infomercial.

Kidding aside, the government (through the HEROES Act) has set interest rates to drop to 0%. This is for all Federal student loans. And, because of this:

No Accrued Interest

So, once the time comes to pay your lender, you will see that there is no added interest (since March 2020) on top of the principal.

The HEROES Act almost makes student loan forbearance seem as good as a deferment, right?

Final Thoughts

With the federal government’s stimulus programs, student loan forbearance can make things easier on your finances — at least for now.

A student loan forbearance helps you put off the dates of payment. Ordinarily, you’d have the interest to worry about too. Luckily, the HEROES Act removed interest rates, making forbearance nearly as good as a deferment.

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