Forbearance is an option that allows borrowers to postpone loan payments while they’re in school. What’s important to know is that interest does not stop accruing during the time. This accrued interest increases the cost of the loan considerably. However, delaying paying off your student loans can also help you focus on finding a job and earning a paycheck. Understanding the pros and cons of student loan forbearance will help you decide whether or not it’s right for you.
The Pros of Student Loan Forbearance
First, let’s cover the positives of this option.
Minimizes the risk of default or wage garnishment
Maybe your income just isn’t enough to cover your personal expenses as well as your loan payments. Unfortunately, if you don’t make full payments on your student loans for more than 270 days, the loans go into default. This can have disastrous consequences.
Your credit score will start taking a hit, making it even more difficult for you to get low-cost loans in the future. In addition, a steep fine will be added to your outstanding balance. Your wages may also be garnished to cover the payments. Student loan forbearance is a far better option than any of the above scenarios.
Frees up cash for everyday expenses and emergencies
Sometimes, stretching your salary till the end of the month can be a struggle. When you’re already overextended, any unforeseen expense can shatter your budget completely. This often has a snowball effect, creating lots of other financial issues. It may also leave you unable to cover that month’s loan payment. Postponing your payments through forbearance can help free up much-needed cash when you’re stretched to the limit.
Lower interest rates as compared to personal or payday loans
Even with capitalized interest, you still pay less than what you’d pay on a personal loan or a payday loan. If you need to free up cash for whatever reason, student loan forbearance is a better option. It works out cheaper than taking a personal or payday loan.
Does not damage your credit score
Forbearance will be noted on your credit report but other than that, it has no impact on your score. This makes it a better option than late or missed payments, which get reported and also damage your score. Remember, you must keep making payments while your application is being processed. If you stop payments before the process is completed, it will be considered as missed payments.
Cons of Student Loan Forbearance
Of course, there are some drawbacks to choosing this route. Let’s go over them.
It’s a costly solution
Capitalization of accrued interest makes loan forbearance an expensive solution. You must calculate how much you’ll be adding to your loan if you choose this option.
Only helps as a short-term solution
Regardless of your financial situation, you cannot postpone payments indefinitely. Lenders will only allow you to pause payments for a set period of time. Very few private lenders allow you to renew your status. Even if they do, it will be only for a limited time again. Renewing your forbearance too many times could result in loan default.
Does not apply if you’re already in default on your student loans
You are not eligible for forbearance if your student loans are already in default. No lender will approve your application.
When Student Loan Forbearance May Be Right For You
Forbearance may be the right option for you if you have high-interest debts to pay. Student loans generally have lower interest rates as compared to most other types of loans. Pausing payments on your low-interest student loans free up cash that can be used to pay off your more expensive loans. By prioritizing your high-interest loans you’ll save a lot on your borrowing expenses. Before choosing this option you must calculate how much extra you’ll pay in accrued interest capitalization on your student loans.
Forbearance may also be right for you if you’ve exhausted all resources and still can’t afford your monthly payments. It will add substantially to the cost of your loan but it’s still better than defaulting on your student loans.
Another scenario in which forbearance may be the best solution for you is when you need cash to cover an emergency. We all know the mounting bills we have to pay for a medical emergency. A vehicle breakdown or urgent home repairs can also make a huge dent in our savings. At times like these, the bills just have to be paid somehow. Pausing payments on your student loans can free up much-needed cash to cover these emergencies.
How To Lower Costs While Your Student Loan Is In Forbearance
We said earlier that your interest keeps on accruing even while your student loan is in forbearance. The accrued interest is then capitalized, which increases the cost of your loan considerably. While the loan is in forbearance, paying off the interest as it accrues can help to lower the cost of the loan.
Alternatives To Student Loan Forbearance
While student loan forbearance can get you out of a tight spot, it should not be your first option. Think of it as the last resort instead. Explore these alternatives before you consider postponing payments on your student loans.
If you have federal student loans, take a look at the income-driven repayment plans first. You’ll find several options, one of which may work without adding to the cost of your loan.
For private student loans, refinancing may be the better solution rather than forbearance. You can choose to refinance with lower monthly payments. This will extend your loan term and add to the cost of the loan but it may still be cheaper than student loan forbearance. Do your calculations to determine which is the better option of the two.
