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When Student Loan Forbearance Is a Good Idea

By U.S. News & World Report

The Student Loan Ranger usually counsels student loan borrowers against taking forbearance — arranging to temporarily not mak e payments — and for good reason. With that said, though, forbearance exists for a reason, and there are certain times when using this tool is truly the best option.

So, how do you know when to use forbearance versus other options? Let’s look at what it means and when it is a good idea.

[Ask these four questions before requesting a student loan forbearance.]

What Is Forbearance?

Forbearance is a tool that federal and many private student loan holders use to temporarily put payments on hold. It can also be used to take care of past-due payments retroactively as long as the loan is not already in default.

The problem with forbearance is that interest still accrues on all loans, even subsidized Stafford loans, and if you do not pay the interest, it is capitalized — or added — on to the principal balance at the end of the forbearance period. This means that borrowers who use forbearance end up paying interest on top of interest, which isn’t good.

The capitalizing interest can also cause your monthly payment to increase because of the larger balance, depending on your payment plan . So if you can’t afford your student loan payments today, you may have an even harder time affording them once the forbearance has concluded.

The other downside of forbearance is that it can make it more difficult for struggling borrowers to get back on track for the long term. Over the years, we’ve noticed that borrowers who make their first year’s worth of payments on time tend to be the ones least likely to default down the road. We believe this is due to creating a habit of repayment.

Just like your rent, mortgage payment or car payment, you’ve developed a habit of paying those every month and generally don’t think twice about it. Once you break a habit, like taking a break from the gym or taking forbearance on your student loan, it can be much harder to recreate that habit.

[Understand student loan forbearances and rehabilitation payments.]

When Should You Use Forbearance?

Even with all the negatives associated with forbearance, this option can still be a financial lifesaver. If you are in a position where you are about to default on your loan and can’t afford to make any payments, this is exactly the time to use this tool.

If your federal student loan is fewer than 270 days past due, you can call and request a forbearance via the phone and your loan holder can process the request immediately. Assuming you have the time available on your loan, the loan holder can use forbearance to clear up your past-due payments and put future payments on hold for up to a total of 12 months per forbearance.

If your loan is 270 or more days past due, which is the legal definition of default on a federal student loan, and has not yet been transferred to a collection agency, you can still call your loan holder and have a retroactive forbearance placed on the account back 120 days. From there, the loan holder can resolve the rest of the delinquency with a written forbearance or through other methods.

The point of this option is to give you a little bit of breathing room before the default point of no return. Remember, default means that you are no longer eligible for forbearance, deferment and lower payment options.

It also means significant collection costs are being added and the loan is due in full immediately. Having forbearance available to pull a loan back from the brink is extremely valuable and can save struggling borrowers thousands of dollars in the long run.

[Know when it’s OK to postpone your student loan payment.]

When Forbearance Isn’t an Option

One thing to remember is that these types of forbearance are discretionary. In other words, loan holders have no obligation to grant them and will only do so if you recommit to repaying your loan.

Most federal loan holders offer a total of between 24 and 36 months over the life of the loan. Private student loan lenders offer much less time, usually only in three-month increments, and will sometimes charge a fee to use them. This is another reason that we counsel borrowers to only use forbearance as a last resort, since you will want to make sure you still have the time available to pursue this option in a financial emergency.

While we still strongly recommend a lower payment option, such as an income-driven plan or interest-only plan, over postponing payments altogether, do not ignore forbearance if it’s the only tool preventing you from defaulting or having a negative credit reporting due to your past-due loan.

More from U.S. News

When Getting Your Loans Out of Default Is a Bad Idea

3 Student Loans for Parents to Fill a College Tuition Gap

Understand Federal Student Loan Wage Garnishment

When Student Loan Forbearance Is a Good Idea originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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