Student loans fill the gap between what students receive in grants and scholarships and what they can provide upfront. After graduation, unexpected financial hardship could curb the borrower’s ability to pay back loans. This could be due to job loss, a health emergency, a car accident, and more. A 2018 study revealed that 20% of student loan debt was overdue.
If you experience an unanticipated event that prevents you from paying your student loans for the time being, you have options. Before you find yourself in this situation though, it is important to stay on top of payments so your lender can be confident you have a good history when making a decision. The most important action to take if you cannot make your payment on time is to communicate with your lender as soon as possible. Your options become more limited after you’ve fallen behind rather than giving them a heads up to your situation.
Deferment vs Forbearance
Deferment and forbearance both allow you to temporarily stop paying your federal loan – each with pros and cons. With a deferment, your lender approves temporary relief based on a specific circumstance such as unemployment, short-term disability, military service, or returning to school part-time. In most cases, interest on federal loans during deferment will be paid by the government. Forbearance occurs when your lender grants permission for you to lower or stop payments for a set period. This is usually done when you know your situation is temporary. Although it could be easier to qualify for, the drawback of forbearance is that you are responsible for the interest accrued during this time.
Deferment is often seen as the preferred option because you will not have to pay back the interest built up during that period. However, forbearance is generally easier to be approved for as the circumstances do not have be as severe. General forbearance allows you to submit an application for the loan provider to review. Mandatory forbearance means that if you meet the qualifications, the loan provider must accept your application. Some events that would qualify you for mandatory forbearance are a medical residency, AmeriCorps service, or that your monthly payment is 20% more than your monthly income. Forbearance also allows you to ask to make smaller monthly payments, rather than stop completely.
Both deferment and forbearance periods can vary. If you qualify for deferment because you are enrolled in school, it could last until you have completed your program and up to six months after. Forbearance normally lasts one year but does not have a maximum. The time period for each would be agreed upon by you and you loan provider before it begins. If you need to extend longer than the original period, you may need to prove the condition or situation still exists.
If you have a private loan, these parameters do not always apply. You will be responsible for the interest accrued regardless of the situation. It could also be more difficult to be approved for deferment through a private lender but, again, the best action is to communicate with them before you are behind on payments. They may be able to lower your interest rate or agree on another type of temporary relief.
Loan Cancellation
A cancellation, or forgiveness, permanently wipes out your obligation to pay the loan. Qualification is difficult, and only certain types of loans are eligible. Conditions that might qualify are permanent disability, death, bankruptcy, or working in a low income area. Contact your lender for an application if you think you may qualify for loan forgiveness.
Additional Options
If you do not have a situation that qualifies you for deferment, forbearance or cancellation and simply do not have enough income to make your payment, there are other avenues.
• Payment Plan Change. If you are working and have a federal student loan, you may be able to adjust your payment plan to match your income level. The government automatically enrolls most borrowers in the Standard Repayment Plan, which pays off the loan in 10 years but has the highest monthly payment. However, you may be able to change to an income-driven plan that is more affordable by contacting your lender.
• Loan Consolidation. If you have multiple federal loans, you may be able to apply for a Direct Consolidation Loan. This will roll all of them into one loan with a lower interest rate and lower monthly payment. You may be able to consolidate loans with a private lender, as well. Review your loan agreements and contact the lender.
Avoid Default
If do you not qualify for any of these options, or fail to apply, and do not make your monthly payment you may be in default. Default comes after delinquency - usually when you've missed payments for nine months on federal loans. Once you default, your loan is accelerated by your lender and you no longer have the option to apply for deferment or forbearance. The debt is then turned over to a collection agency and the entire balance is due immediately. They will aggressively be in contact with you and may charge your lender a fee that you are responsible for paying.
At any time in the collection efforts, you can negotiate a reasonable and affordable payment plan. The collection agency or lender will determine what you can pay based on your income and other expenses. If you make 9 out of 10 monthly payments within 20 days of the due date, you will qualify to be out of default. Your credit report will be updated, and any reference to the default will be eliminated.
Staying ahead of your payments by creating a budget and knowing how much to save could help you avoid missing monthly loan payments. Find more money management tips through BankFive's online resources.
If you experience an unanticipated event that prevents you from paying your student loans for the time being, you have options. Before you find yourself in this situation though, it is important to stay on top of payments so your lender can be confident you have a good history when making a decision. The most important action to take if you cannot make your payment on time is to communicate with your lender as soon as possible. Your options become more limited after you’ve fallen behind rather than giving them a heads up to your situation.
Deferment vs Forbearance
Deferment and forbearance both allow you to temporarily stop paying your federal loan – each with pros and cons. With a deferment, your lender approves temporary relief based on a specific circumstance such as unemployment, short-term disability, military service, or returning to school part-time. In most cases, interest on federal loans during deferment will be paid by the government. Forbearance occurs when your lender grants permission for you to lower or stop payments for a set period. This is usually done when you know your situation is temporary. Although it could be easier to qualify for, the drawback of forbearance is that you are responsible for the interest accrued during this time.
Deferment is often seen as the preferred option because you will not have to pay back the interest built up during that period. However, forbearance is generally easier to be approved for as the circumstances do not have be as severe. General forbearance allows you to submit an application for the loan provider to review. Mandatory forbearance means that if you meet the qualifications, the loan provider must accept your application. Some events that would qualify you for mandatory forbearance are a medical residency, AmeriCorps service, or that your monthly payment is 20% more than your monthly income. Forbearance also allows you to ask to make smaller monthly payments, rather than stop completely.
Both deferment and forbearance periods can vary. If you qualify for deferment because you are enrolled in school, it could last until you have completed your program and up to six months after. Forbearance normally lasts one year but does not have a maximum. The time period for each would be agreed upon by you and you loan provider before it begins. If you need to extend longer than the original period, you may need to prove the condition or situation still exists.
If you have a private loan, these parameters do not always apply. You will be responsible for the interest accrued regardless of the situation. It could also be more difficult to be approved for deferment through a private lender but, again, the best action is to communicate with them before you are behind on payments. They may be able to lower your interest rate or agree on another type of temporary relief.
Loan Cancellation
A cancellation, or forgiveness, permanently wipes out your obligation to pay the loan. Qualification is difficult, and only certain types of loans are eligible. Conditions that might qualify are permanent disability, death, bankruptcy, or working in a low income area. Contact your lender for an application if you think you may qualify for loan forgiveness.
Additional Options
If you do not have a situation that qualifies you for deferment, forbearance or cancellation and simply do not have enough income to make your payment, there are other avenues.
• Payment Plan Change. If you are working and have a federal student loan, you may be able to adjust your payment plan to match your income level. The government automatically enrolls most borrowers in the Standard Repayment Plan, which pays off the loan in 10 years but has the highest monthly payment. However, you may be able to change to an income-driven plan that is more affordable by contacting your lender.
• Loan Consolidation. If you have multiple federal loans, you may be able to apply for a Direct Consolidation Loan. This will roll all of them into one loan with a lower interest rate and lower monthly payment. You may be able to consolidate loans with a private lender, as well. Review your loan agreements and contact the lender.
Avoid Default
If do you not qualify for any of these options, or fail to apply, and do not make your monthly payment you may be in default. Default comes after delinquency - usually when you've missed payments for nine months on federal loans. Once you default, your loan is accelerated by your lender and you no longer have the option to apply for deferment or forbearance. The debt is then turned over to a collection agency and the entire balance is due immediately. They will aggressively be in contact with you and may charge your lender a fee that you are responsible for paying.
At any time in the collection efforts, you can negotiate a reasonable and affordable payment plan. The collection agency or lender will determine what you can pay based on your income and other expenses. If you make 9 out of 10 monthly payments within 20 days of the due date, you will qualify to be out of default. Your credit report will be updated, and any reference to the default will be eliminated.
Staying ahead of your payments by creating a budget and knowing how much to save could help you avoid missing monthly loan payments. Find more money management tips through BankFive's online resources.