Alternate name: Loan forbearance Types of hardships can be wide-ranging. They can include medical emergencies, permanent disability, job loss, temporary unemployment, natural disaster, divorce, and more. For instance, from March 13, 2020, to Aug. 31, 2022, federal student loan borrowers are being placed in administrative forbearance. During this time, federal student loan payments are automatically paused. However, people can choose to make payments if they wish.
How Does Forbearance Work?
The key to forbearance is that it is temporary. The length of time that a lender will allow forbearance varies. For example, it is a maximum of 18 months before the borrower has to start making payments again on mortgage loans. One important characteristic of forbearance is that interest continues to accrue during the pause. If you are able, you may choose to keep paying the interest during the forbearance period. If you don’t, the interest will be added to the principal of the loan. This will mean that you pay more in total interest paid over the life of the loan.
Extending the term of the loanPostponing the payments on the loanReducing the payments on the loan
Types of Forbearance
There are three main types of loans for which you might get forbearance:
Student Loans
Student loans may be the most commonly deferred loan type. This kind of loan debt has become increasingly burdensome. Former students with outstanding loans are more likely than not to place their loans in forbearance at least once. The latest statistics available are for 2013 which show that 32% of student loans were never in forbearance, 48% were in forbearance for less than 18 months, and 20% were in forbearance for more than 18 months. By November 2020, over 22 million former students were in forbearance with direct loans totaling close to $887 billion. If you are thinking about applying for student loan forbearance, it’s important to know the risks. Remember that you will be responsible for paying the increased interest costs that accrue. Forbearance should not be a way to put off repayment. It is not a long-term strategy to make loan repayment more affordable and should be only the solution to an emergency.
Mortgage Loans
If you have a mortgage and run into financial hardship, you may be eligible for forbearance on your loan. Banks and other lenders know that homeowners can run into difficult financial times for many good reasons.
The first is discretionary or general forbearance. It is available to just about anyone with any kind of financial hardship. It should be a last resort.Another type of student loan forbearance is mandatory forbearance. This type is available if you are in the National Guard and are deployed, if you are in a medical residency or internship program, or if your payment is more than 20% of your monthly income. It’s called “mandatory forbearance” because your loan provider is required to give it to you under these circumstances.
You and your lender will work together to determine if you qualify for forbearance. You will also discuss the terms of the agreement, including how long the forbearance period will be, how much your payment will be reduced, and how much you will repay the lender. You may have to repay the lender at a higher interest rate, but forbearance will help you avoid foreclosure on your home. It could also save your credit score. Once the forbearance ends, you have to repay the principal, interest, taxes, and insurance on your home per your forbearance agreement.
Credit Card Debt
During the Great Recession of 2008-2009, credit card default rates rose. During the first and second quarters of 2020, they rose again. Missing payments and paying late fees can tank your credit. Many banks that issue credit cards have forbearance programs that can offer you some relief. If you are experiencing hardship, call and ask for their credit counselors. They may be able to help you with a forbearance application.
