Are you struggling with student loan payments you can’t afford? You are not alone. A lot of borrowers are feeling the same way.
This type of debt has become one of the most dangerous credit obligations. The main reason is the aggressive collection methods for those who default on their loans. One of the biggest mistakes that you can ever make on this credit obligation is not to make payments.
According to an article published on NOLO.com, the consequences of defaulting on your college debt are as follows:
- Ruined credit history.
- Increase in loan balance since interest will continue to accrue and collection fees will all be capitalized on your balance.
- Legal suits filed against you.
- Wage garnishment, and threatened Social Security benefits and tax refunds (at least for federal student loans).
There are probably more negative consequences apart from these and this is why defaulting on this type of debt is highly discouraged.
Fortunately, there are options for you to avoid defaulting on your student loan debt. Of course, you will have to qualify for them as you cannot just tell them that you are having a hard time paying off what you owe from school. You need to prove to them that you are in a financially difficult situation.
What happens to your college debt when in deferment or forbearance?
Even if your finances cannot afford to continue making payments towards your student loan, your lenders do not really care about that. All they really care about is how you will repay your student loans. No ifs and no buts. If you choose to ignore it, you will only be making things worse. This is why you have to talk to your loan servicer or private lender about your options. And two of the options that they will offer you is either deferment or forbearance.
Of all the choices that you have to stop making payments (or at least reducing them) without defaulting on your loans, these two are most encouraged options. Let us define them both.
Deferment is a time when you are officially allowed to stop sending payments towards your student loans. When we say official, it means you will not be charged with late penalty fees and your account will not be deemed as a defaulted loan. Of course, this is only temporary. It will end at some point (sometimes up to 3 years) and once that period ends, you are expected to pay your loan as usual.
It is important to note that most student loans will continue to accrue interest while in deferment. If you have subsidized federal loans, this means the government will pay for your interest while you are in deferment. In this situation, deferment will really benefit you. However, if you do not have a subsidized loan, the benefits will not be as extensive. The interest that you will not pay during this period will be capitalized and added to your outstanding balance. That means, after your deferment is done, you will find that your loan balance has grown. The longer you stay in deferment, the bigger your debt becomes.
Forbearance, on the other hand, is your option when you do not qualify for deferment. This is when you are allowed to stop or lower your monthly payments without being charged with late penalty fees. This can go as long as 12 months. The difference with a deferment scenario is your interest will always accrue – regardless if you have a subsidized or unsubsidized loan.
Obviously, the better option here is deferment but that would depend on the type of student loan that you have, your financial situation and your reason for deferring on your loans.
According to an article published on HuffingtonPost.com, a lot of borrowers are in deferment or forbearance as of the first half of 2014. Specifically, 18% are in deferment while 15% are in forbearance. It is hard to determine the main reason for borrowers to opt for these two temporary student loan relief. The records kept by the government is not really complete or organized enough to provide this data.
Scenarios that allow you to postpone or reduce your student debt payments
As mentioned, not everyone can be approved for deferment or forbearance. Here are the specific requirements as provided by StudentAid.ed.gov.
You can apply for deferment, at least this is true for federal student loan borrowers, if you are in the following situations.
- You are enrolled at least half-time in a qualified college or career school.
- You are still studying in relation to your graduate studies or in a rehabilitation training program for disabled individuals.
- You are unemployed or unable to find work (can avail of up to 3 years of deferment).
- You are currently experiencing economic hardship (can avail of up to 3 years of deferment).
- You are currently serving an active duty in the military during a war, military operation or national emergency.
- You are a member of the National Guard/Armed Forces Reserve or you were called to duty while enrolled at least half-time (current or within 6 months of enrollment) – as long as the period is within 13 months following the end of your active duty or return to enrollment.
- You are within a period of service that qualifies for a Perkins Loan discharge or cancellation – applicable to Perkins Loans only.
All of these (except for the last one) are applicable to Direct, FFEL and Perkins Loans.
When it comes to forbearance, there are two types that you can avail and the qualifications will depend on them.
- Discretionary Forbearance. This is when the lender decides if you will be allowed forbearance. Usually, you will be approved if you can prove financial hardship or illness that leaves you unable to work and earn money.
- Mandatory Forbearance. This is when your specific situation requires the lender to grant you forbearance. These situations include internship or residency (medical or dental), you received a national service award after serving a national service position, your teaching profession qualifies you for a teacher loan forgiveness, you qualified under the US Department of Defense Student Loan Repayment Program, or you are a member of the National Guard. It is also possible to get forbearance approval if your student loan monthly payments amount to 20% or more of your monthly gross income.
Tips when postponing or reducing payments on your college loans
Even when you qualify for deferment or forbearance, you need to know a couple of tips first before you can really demolish your student loan debt. Here are a couple of tips that you can follow.
- Check if you can at least pay the interest of your loan. Deferment is really beneficial for those who have subsidized student loans. That means the government takes over the interest payments. If your loan is unsubsidized, that means your interest is accruing while in deferment. In forbearance, your interest accrues even if you have subsidized or unsubsidized loans. As mentioned, this means you will have a bigger balance at the end of the deferment or forbearance period. If you can pay the interest, you can keep it from accruing or capitalizing on your principal balance.
- Live a frugal life to strengthen your finances. Being approved of deferment or forbearance on your student loans mean you are in a financial hardship. To help maximize the benefit of these two, you need to adapt a frugal lifestyle to lower your expenses significantly. That way, you can increase your extra money thanks to either the deferment or forbearance and your lower expenses.
- Research on repayment plans that you can use after. As mentioned, this is a temporary arrangement on your student loan accounts. It will end. And when it ends, it will not be towards forgiveness. That means you still need to pay off what you owe. Make sure that while you are in deferment or forbearance, you take this chance to research on the repayment options that you can use. If that means going into a public service career, then you need to be aware of what you need to do to qualify for these.