21 May Student Loan Deferment and Forbearance
People with thousands of dollars in student loan debt often look at student loan deferment or forbearance as a solution to their immediate financial woes. The current student debt crisis means that more people are considering their options than ever before. These options either let you stop making your payments on your federal student loans temporarily, or they reduce the number of your monthly payments. Although these repayment options might help some borrowers, not everyone qualifies for these programs.
Certainly, the idea of student loan forgiveness is even more appealing. Many people have chosen this option to erase their student loan debt and get a new start. Those who entrusted their loan forgiveness to a student loan servicer company named Navient ended up entangled in a number of lawsuits. One of the complaints against Navient was that they steered borrowers towards multiple forbearances instead of income-driven repayment plans. This is a perfect example of how challenging the student loan environment has become lately.
What Is a Student Loan Servicer?
Navient is just one example of a student loan servicer. They are the company that you make payments to each month on your student loans. They take care of the billing and applying for student loan deferments, forbearances, and loan consolidation. When circumstances change, you report them to your student loan servicer. Ideally, the company works with you and lets you know your best options for managing your student loan debt. Failing to meet this obligation is the reason behind the student loan forgiveness lawsuits.
You don’t get to choose your student loan service, and it isn’t unusual for it to change. To find information on your federal student laws, visit the Federal Student Aid website. It’s in your best interest to stay up-to-date on the status of your loans and stay in touch with your student loan servicer.
The Difference Between Forbearance and Deferment – Which Is Better?
Both deferments and forbearance mean similar things in that, depending on your eligibility, you can postpone or reduce payments. The biggest difference is that a deferment mightnot require you to pay the interest that accrues on some loans while in deferment. In contrast, you must pay all interest that accrues during a forbearance regardless of what type of federal student loan you have.
If you must pay the interest that accrues on the loan, you might make the payments in one of two ways: One, pay it as it accrues, or two, let the interest accrue throughout the deferment period and then add it to the balance at the end. What many borrowers don’t realize is that the latter option results in a higher payoff overall. The interest is only capitalized on the Federal Family Education Loan Program (FFEL) and Direct Loans. If you have a Perkins loan, the interest that accrues will never be capitalized (see below).
What Is Interest Capitalization?
If you have any kind of student loan, you pay interest on it. Your loan statements will show a balance for your principal (the amount of money you borrowed) and your interest (the additional amount you paid to borrow the money.) For example, if you borrow $20,000 at 6 percent interest, your principal would be $20,000 and the interest due by the end of your grace period would be $3,600.
Interest capitalization means the interest gets added to the principal of your loan. In the previous example, failing to pay the interest as it accrues interest will result in a total balance of $23,600. But that isn’t the end of it. The additional $3,600 also continues to accrue interest which, in turn, is added to the total balance. You end up paying interest on your interest!
Interest capitalizes on federal student loans following a period of forbearance or a period of deferment on an unsubsidized loan. Other reasons interest might capitalize include reaching the end of a grace period on an unsubsidized loan, leaving an income-based-repayment plan, or consolidating your loans. Paying on your interest before it capitalizes can save you hundreds or thousands of dollars.
Are You Eligible for Student Loan Deferment?
The criteria for student loan deferment eligibility is a bit complex. One problem borrowers encounter is that they don’t know who their loans are with or what their real options are. If you meet any of the following criteria, you might be eligible for:
- an in-school deferment, if you are enrolled at least half time in an eligible college or career school, and if you received a Direct Plus Loan or FEEL Plus Loan as a graduate or professional student for six additional months, after no longer being enrolled a minimum of half-time
- a Parent PLUS borrower deferment, if you are the parent who received an FFEL PLUS loan while the student recipient is enrolled a minimum of half time at an eligible college or career school, and for six additional months after the student is no longer enrolled a minimum of half time
- a Graduate Fellowship deferment, if you are enrolled in an approved graduate fellowship program
- a Cancer Treatment deferment, while you are receiving cancer treatment and for an additional six months after the treatment is concluded
- a Rehabilitation Training Program deferment, if you are enrolled in an approved rehabilitation training program for the disabled
- an Unemployment deferment, if you are unemployed or unable to find full-time employment for up to three years
- an Economic Hardship deferment while you experience economic hardship or are serving in the Peace Corps for up to three years
- a Military Service and Post-Active Duty Student deferment if you were on active military duty in connection with a war, military operation, or national emergency during the 13-month period after concluding the service or until you return to college or career school at least half-time
Additional options for a student loan deferment include borrowers of a Direct Loan who had a balance on an FFEL Program made prior to July 1, 1993, when they received their first Direct Loan, or for FFEL Program borrowers who received loans prior to that date. If you meet these criteria, you might qualify for an additional deferment or for other options than those that normally apply.
Eligibility for Forbearance
There are two types of forbearance: general and mandatory. It’s up to your student loan servicer whether to grant your request for general forbearance based on your situation. It is up to the loan servicer’s discretion to grant the general forbearance if you can’t make your monthly loan payments temporarily due to:
- financial difficulties
- medical expenses
- change in employment
- other acceptable reasons
Forbearance is available for Direct Loans, Perkins Loans, and FFEL Program loans for a period of no more than 12 months at a time. If, after that period of time, you are still experiencing financial hardship, you can request an additional general forbearance. On Perkins Loans, the cumulation of general forbearances can’t add up to more than three years. While a cumulative limit on general forbearances doesn’t apply to Direct Loans or FFEL Program loans, your student loan servicer has the discretion to limit the maximum period of time you can receive a general forbearance.
Your loan servicer must grant a mandatory forbearance if you meet the eligibility requirements. You might be eligible for:
- a Mandatory Forbearance for Medical or Dental Internship/Residency, National Guard Duty, or Department of Defense Student Loan Repayment Program, if you are serving in a medical or dental internship or residency program and you meet specific requirements (applies to Direct Loans and FFEL Program loans only)
- a Mandatory Forbearance for Student Loan Debt Burden, if the total amount you owe monthly for all of your student loans is 20 percent or more of your total monthly gross income (applies to Direct Loans, FFEL Program loans, and Perkins loans for up to three years)
- an AmeriCorps forbearance, if you are serving in an AmeriCorps position for which you received a national service award (applies to Direct Loans and FFEL Program loans only)
- a Teacher Loan Forgiveness Forbearance, if you are performing teaching service that would qualify you for teacher loan forgiveness (applies to Direct Loans and FFEL Program loans only)
- a Mandatory Forbearance for Medical or Dental Internship/Residency, National Guard Duty, or Department of Defense Student Loan Repayment Program, if you qualify for partial repayment of your student loans under the U.S. Department of Defense Student Loan Repayment Program (applies to Direct Loans and FFEL Program loans only)
- a Mandatory Forbearance for Medical or Dental Internship/Residency National Guard Duty, or Department of Defense Student Loan Repayment Program if you are a member of the National Guard and have been activated by a governor but are not eligible for a military deferment (applies to Direct Loans and FFEL Program loans only)
The maximum time period for a mandatory forbearance is 12 months. However, if you meet eligibility requirements after that period expires, you can request an additional mandatory forbearance.
In most cases, you must submit the appropriate request form to your loan servicer. Most deferments and forbearances aren’t given automatically. In addition to the request form, you must also submit documentation proving that you meet the specific eligibility requirements for the type of deferment or forbearance you are requesting.
One exception is when you enroll in an eligible college or career school at a minimum of half time. Usually, the loan is placed in deferment automatically. If it isn’t, you must notify the school of enrollment. They will then send the information to your loan servicer, so they can place your loan in deferment.
Is Student Loan Deferment or Forbearance Right for You?
Both forbearance and deferment are short-term solutions for some borrowers but only when the circumstances preventing you from making your payments are temporary. If it isn’t clear how long your situation will last or if you can resume making your payments after the deferment or forbearance period. you should consider different options.
One alternative is to change to an income-driven repayment plan. These plans base the amount you pay monthly on how much money you make and the size of your family. Some borrowers qualify for payments of $0 per month. If you can’t repay your loan after 20 or 25 years, you might even qualify for loan forgiveness.
Most financial experts recommend contacting your student loan servicer whenever you have trouble making your monthly payments. Many borrowers don’t know the terms of their loans or their options for help until the payments become a burden. Unfortunately, the large amount of student loan debt in this country has also given way to numerous scams where people try to get your information or make promises that are too good to be true.
The criteria for student loan deferment and forbearance applies to only a small percent of all student loan borrowers. If you do qualify and apply for a deferment or forbearance, it might only buy you a little time before you end up in the same position. With some loans, you could end up paying even more once interest is capitalized. Failing to meet your payments before a forbearance or deferment is granted could also add to your problems. If the request is denied, your loan becomes delinquent and you might default on your loan.
Ironfist Legal gives some student loan borrowers an additional option for lowering or eliminating their student loan debt. Attorney-Based Student Loan Modification is designed to help individuals with more than $30K in student loan debt. Those who qualify are guaranteed a reduction in their student loan principal balance by 30 to 70 percent. Some individuals have their loan balance forgiven.
A student loan modification isn’t a temporary solution. The criteria extends to a broad range of borrowers including those who are victims of predatory lenders. You might be eligible for a student loan modification if you:
- are facing an undue hardship
- were misled about potential job placement
- feel you were misled or coerced into taking large loans for your education
- aren’t benefiting from your education
- were misled about student loan forgiveness options
- have had to defer payments or request forbearance options
- simply can’t afford ongoing payments
These are just some of the eligibility requirements for obtaining a student loan modification. Contact us to learn more about your options for obtaining permanent, real relief from your student loan debt.