While deferments and forbearances might initially seem like a smart choice, they often lead to more problems. In fact, there are only a couple of circumstances in which a typical deferment is a smart decision.

The primary problem with deferments and forbearances is that borrowers are charged interest during the break in payments, so their balance grows.

The big exception to the “deferments and forbearances are dangerous” guidance occurs when a borrower isn’t charged interest. For example during the Covid-19 payment pause and the more recent SAVE litigation pause, borrowers were not charged interest.

Reasons you may want a deferment:

• Planning a major purchase like a car
• You are saving for a down payment on a new home
• The holidays are coming up
• You don’t start your new job for a few months
• You expect a raise in a few months
• Summer vacation should not be interrupted by student loans
• You are looking for a job/a better paying job

The reason(s) most deferments and forbearances are a mistake

Taking a break from paying your student loans is a bad idea from a financial and psychological point of view.

Financially, it is a terrible idea because of all the interest involved.

It isn’t just that you are not reducing your balance, the problem is that your balance is growing each month. If you defer on your student loans because of a financial hardship, the debt is only going to grow. Your issues, like your interest, compound each month you choose not to pay.

Another way of viewing the danger of a deferment is to remember that most lenders prefer borrowers take deferments early in repayment.

Most student loans include a six-month grace period post-graduation, during which no payments are required, but interest continues to accrue. During this time, the balance of the loan just grows. Deferments and forbearances increase lender profits. The only time a lender doesn’t want to do a deferment or a forbearance is if they fear that the borrower will never be able to pay back the debt.

From a mental standpoint, getting a deferment or forbearance on your loan can create bad habits.

In the six months you are not paying your loan, you may grow accustomed to spending money you really don’t have. Breaking bad spending habits is especially hard to do. The other problem with deferment is that you may think in the back of your mind that it will always be an option. However, for most loans, deferments and forbearances are limited. If you run out, and you really need another, you are out of luck. Therefore, you should never plan on using them and treat them as an option only in case of an emergency.

The Interest Free Forbearance Exception

If the big risk to a forbearance is the daily interest charges, our analysis changes dramatically with a forberance that doesn’t charge interest.

For most federal and private loan borrowers, opting for a pause in payments at 0% interest isn’t an option. Lenders don’t make any money, and borrowers don’t have any incentive to make payments. Five years ago, the idea of an interest-deferement was a pipe dream for borrowers.

The Covid-19 pandemic changed things. In March of 2020, federal student loan borrowers were put on a payment pause that did not charge interest. More recently, borrowers on the SAVE repayment plan were put on an interest-free forbearance while the legal challenges to block the plan are being litigated.

When these payment pauses happpen, the analysis changes. For the borrowers who find themselves with an interest-free forebearance, making payments is almost always a mistake. Borrowers have several great alternatives to choose from. For example, instead of paying down an interest-free loan, these borrowers can put money in a savings account, earn interest, and then make a lump sum payment as the interest-free forbearance is coming to an end.

When should you get an interest-charging deferment?

The answer to this question is pretty easy.

If you absolutely cannot afford to pay your loans, and you have no other choice, pick a deferment.

While deferment is a bad idea for the reasons already discussed, delinquency and default are much worse. Not only will you run into late fees and still get hit with the huge interest payments, but it will also hurt your credit score.

The key takeaway: Only seek deferment when you’re truly unable to make your student loan payments, not simply to avoid them.

Even in this emergency situation, a deferment only makes sense some of the of the time.

Obtaining a deferment may be a logical move if you’re waiting for your first paycheck from a new job. If there is no extra income in your future, and your bills are not going to change, a deferment won’t fix anything. Six months later you will be in the exact same position, except your loan balance will be larger.

Borrowers who cannot afford their debt and don’t see things changing need to work with their lenders to investigate options to get lower interest rates or change repayment plans.

Deferment and Forbearance Alternatives

Part of the reason a deferment or a forbearance is usually a bad idea is because better alternatives exist.

For borrowers challenged by federal loans, income-driven repayment plans offer the ability to get lower payments, potentially down to $0 per month. Though the monthly bill is identical to a deferment, it helps a borrower work toward forgiveness.

Private loans get more tricky, but with many options to lower interest rates, borrowers should be pursuing these options before settling for a deferment or a forbearance.

The post Student Loan Deferments are a Recipe for Disaster appeared first on The Student Loan Sherpa.

Usually, if you pause your loan payments, it also stops the countdown to forgiveness. But, there are some exceptions to this rule.

A recent reader email perfectly shows how pausing your loan payments can create problems if you’re trying to get your student loans forgiven.

The Reader Email about the Student Loan Forgiveness Clock and Forbearances

Reader Gene writes:

Over the last seven years, I have made about 80 PSLF qualifying payments. During that time, I was on three months of Administrative (processing) Forbearance and three months of Hardship Forbearance.  

Will the months of Administrative Forbearance or Hardship Forbearance count as qualifying payments?

Thank you!

Public Service Loan Forgiveness Basic Requirements

As seen in our detailed breakdown of the Basics and the Fine Print on Public Service Loan Forgiveness, time towards the required ten years, or 120 months, basically has three basic requirements:

1. Eligible Loans – Not all federal loans are eligible. This includes certain Plus loans as well as FFELP loans. However, some loans can be made eligible through federal direct consolidation.
2. Eligible Repayment Plan – Only specific repayment plans will count towards PSLF. The income-driven plans such as IBR, PAYE, and SAVE count, but the graduated and extended repayment plans are not eligible.
3. Eligible Employer – Only employers that fall within the Department of Education’s definition of public service will count. This includes most government agencies and 501(c)(3) non-profits.

Because there is room for confusion within these requirements for PSLF, we suggest sending an employment certification form to your federal servicer every year. This is the best way to track progress and ensure you meet all the requirements.

Is my employer eligible for Public Service Loan Forgiveness? The exact eligibility requirements can be a bit complicated. This article breaks down the criteria for eligibility. Additionally, the Department of Education recently created the PSLF Help Tool to assist with the verification process.

Forbearances and Deferments and Time Towards Student Loan Forgiveness

Unfortunately for Gene, deferments and forbearances usually do not count towards the required 120 payments for Public Service Loan Forgiveness. Additionally, this time will not be eligible for the 20 or 25-year forgiveness programs under an Income-Driven Repayment Plan.

This is because a forbearance or deferment means that the borrower made no payment under an eligible repayment plan. (Note: $0 payments on an income-driven repayment plan can count.)

This rule can be incredibly frustrating in Gene’s case because he spent three months on an administrative forbearance. Administrative forbearances are usually the result of slow processing or errors on the part of the student loan servicer.  Sadly, there is no mechanism in place to get these months to count towards PSLF.

Good News for Gene: The rules haven’t changed, but a new temporary exception will help Gene and millions of other borrowers.

Scroll down to the temporary exceptions to learn more.

The Massive Exception to the Rule

As part of the Covid-19 economic relief, all federal student loan payments were paused, and interest rates were set to zero.

Fortunately for borrowers, this deferment of payments will count towards Public Service Loan Forgiveness and Income-Driven Loan Forgiveness.

Borrowers don’t need to make extra payments for the time to count towards loan forgiveness.

The Temporary Exceptions

There are two notable temporary exceptions to the rule. One has expired, while the other is still available.

The Limited Waiver on Public Service Loan Forgiveness – (Expired)

In October 2021, the Department of Education announced rules for expanded Public Service Loan Forgiveness eligibility.

Under the expanded rules, called the Limited Waiver, active duty military service counted toward PSLF, even if the borrower was on a military deferment.

The Limited Waiver on Public Service Loan Forgiveness program ended on October 31, 2022.

One-Time IDR Account Adjustment – Expected Mid-2024

In April of 2022, the Department of Education announced an update to the rules for calculating progress towards forgiveness. Previous periods of deferments and forbearances may now count towards forgiveness under this one-time update.

Crucially, this time can also be used toward PSLF.

Most borrowers do not need to take any action to get this benefit, but consolidation may be required for borrowers with certain loans, such as FFEL.

Avoiding PSLF delays due to Forbearances and Deferments

Borrowers working towards PSLF should all be on Income-Driven Repayment (IDR) plans.

One of the key requirements to stay enrolled in the IDR plans is to certify your income yearly. Missing certification deadlines can cause delays in enrollment and force a forbearance or deferment. It can also cause an interest capitalization, which can be expensive.

Bottom Line

Federal student loans can be forgiven after ten years of public service or 20 years of IDR payments. Unfortunately, things don’t always go smoothly, and sometimes progress stops.

If you are working towards student loan forgiveness but your loans are on a deferment or a forbearance, the clock is likely paused.

The post Does Deferment or Forbearance Time Count for Student Loan Forgiveness? appeared first on The Student Loan Sherpa.

Many lenders and loan servicers are guilty of making it look like a payment pause is interest-free when the borrower’s balance actually grows.

This article will cover the times a forbearance or deferment is truly interest-free. We will also look at strategies for borrowers chasing PSLF, credit score implications, and more.

General Rule: Even if you don’t have to make payments, interest accrues

The vast majority of forbearances and deferments charge interest.

For this reason, many lenders make it relatively easy for borrowers to get a deferment or forbearance. A six-month to one-year payment pause is often easy to get.

The problem with this relief is that it is temporary. Worse yet, each deferment or forbearance usually makes things worse. By not making payments, the balance grows. The larger balance means more debt to eventually pay off. It may also mean higher monthly payments.

An income-driven repayment plan is usually the best option for borrowers struggling with federal loans. IDR payments count towards student loan forgiveness, and borrowers may qualify for $0 monthly payments for many years.

Sherpa Tip: Sometimes, people get confused about the interest charges because balances don’t immediately reflect the daily interest that the loan generates.

This extra interest usually sits off to the side until the interest gets capitalized. Many billing statements and invoices do not make this detail clear.

What is the difference between a Deferment and a Forbearance?

I’m often guilty of using the terms deferment and forbearance interchangeably.

In most cases, there isn’t much of a difference. The strategy behind deferments and forbearances is usually the same. Likewise, both payment pauses usually charge interest.

However, interest charges are the one area where a deferment and a forbearance work differently.

Other than one notable exception, federal loan forbearances always charge interest. Conversely, a deferment sometimes charges interest.

Deferments where interest does not accrue

Whether or not you are charged interest during a deferment usually depends upon the loan type.

According to the Department of Education, the following federal loans generally do not accrue interest during a deferment:

• Direct Subsidized Loans
• Subsidized Federal Stafford Loans
• Federal Perkins Loans
• The subsidized portion of Direct Consolidation Loans
• The subsidized portion of FFEL Consolidation Loans

In other words, if your loan is a subsidized or a Perkins loan, you usually won’t get charged interest during a deferment.

All other federal loans get charged interest during a deferment.

The Exception to the Rule

The Covid-19 federal student loan payment suspension is technically an administrative forbearance. All federally-held student loans are on a forbearance with a 0% interest rate.

This is the one time that borrowers on a federal forbearance don’t accrue interest charges.

Are Private student loan deferments and forbearances interest-free?

With private loans, lenders almost always charge interest during a deferment or forbearance.

I use the term almost always because each private loan is governed by the terms of the loan contract that the borrower signed. It is conceivable that a private loan may have a provision where the borrower is not charged interest during a payment pause.

However, interest will accrue during all forbearances and deferments for the vast majority of private loan borrowers.

Making Interest-Only Payments During a Deferment or Forbearance

Sometimes it is a good idea to make a payment, even if it isn’t required.

Ultimately, whether or not you should make payments during a forbearance or deferment depends upon your debt-elimination strategy.

Interest-Only Payments During an In-School Deferment

I often advise students to make interest payments each month on all of their student loans.

This strategy is helpful because it encourages responsible borrowing during college. Many students are guilty of borrowing more student loans than necessary. Once school ends and they start receiving bills, they regret how much debt they incurred.

The students who make interest-only payments during school have a much better appreciation for the mountain of debt they are building. Each new loan means a new monthly payment. Students making interest payments will have a huge incentive to borrow less and to seek out low-interest loans. The monthly payment is also an excellent reminder of the importance of finding a job that pays well after school.

Interest-Only Payments for Borrowers After Graduation

The best student loan repayment strategies usually require borrowers to make minimum payments on all of their loans except one. The one loan targeted for elimination gets all available extra funds.

Borrowers who pay a little extra towards all of their loans often spend more than necessary on interest.

If your student loan repayment strategy calls for eliminating one specific loan first, don’t worry about making payments on a loan in deferment or forbearance.

For example, if you are attacking a private loan at 11% interest, it isn’t necessary to make payments on a deferred loan charging 6% interest. While the deferred loan balance is growing, which is bad, the loan with the 11% interest rate is doing more damage.

Managing Loans when a Deferment or Forbearance Ends

The most important thing to know about deferments and forbearances is that they are temporary fixes. Borrowers need to come up with a plan to eliminate their debt.

Additionally, it is a good idea to make sure that your contact information is up to date. As your payment pause comes to an end, your lender may send out important emails or letters. If you miss these messages, you risk late payments and negative credit reporting.

Finally, those who are enjoying a payment pause due to Covid should expect a mess once payment resumes in February 2022. Ideally, you should reach out to your servicer with any questions before the restart happens.

Deferment and Forbearance Interest Frequently Asked Questions

The post Interest Charges on Deferments and Forbearances appeared first on The Student Loan Sherpa.

Sometimes a break in payments can be the result of a simple accident, such as a missed payment. Other times, a financial hardship may force a borrower to take a deferment or a forbearance.

These gaps in payments can impact the student loan forgiveness clock for programs like Public Service Loan Forgiveness (PSLF) and the various income-driven repayment plans. Fortunately, in most cases, borrowers will not have to start over in their march towards forgiveness.

The Forgiveness Clock and Breaks in Payments

The general rule is that a break in payments will not count towards student loan forgiveness.

On the Federal Student Aid page for Temporary Relief, the Department of Education explains that “[i]f you’re pursuing loan forgiveness, any period of deferment or forbearance likely will not count toward your forgiveness requirements. This means you’ll stop making progress toward forgiveness until you resume repayment.”

However, there are a couple of notable exceptions. The payment pause during Coranavirus should count towards forgiveness. Additionally, the Federal Student Aid page for Income-Driven Repayment does state that an economic hardship deferment will still count towards the required 20 or 25 years necessary for income-driven repayment forgiveness.

Arguably the most important detail for borrowers who take a deferment or a forbearance is that the clock does not reset. It merely pauses. Even though we normally talk about forgiveness coming after 10, 20, or 25 years, the more accurate way to say it would be 10, 20, or 25 years worth of payments. In other words, it is a monthly tally that loan servicers will be looking at when making decisions on qualifying for forgiveness.

Forbearances and Deferments Should Still Be Avoided

Even though a forbearance or a deferment doesn’t mean starting from scratch on forgiveness, it doesn’t mean that a forbearance or a deferment is a good idea.

In the vast majority of cases, loans on a deferment or forbearance will continue to accumulate interest. At the end of the payment break, the accrued interest is added back to the principal balance. This step is called interest capitalization. Thus, at the end of the payment pause, the borrower has a larger loan balance.

For this reason, borrowers usually are better off sticking with an income-driven repayment (IDR) plan during a financial hardship. Months on an IDR plan count towards forgiveness, and payments can be as low as $0 per month.

Federal Direct Consolidation and the Forgiveness Clock

When we talk about resetting the student loan forgiveness clock, the biggest danger is probably federal direct consolidation.

The federal direct consolidation process pays off an old loan and creates a new loan. As such, the new loan starts at the beginning for the purposes of forgiveness.

There are cases where federal direct consolidation is a smart move. However, there are also cases where it could be a huge mistake. Additionally, timing is very important. Consolidation right after finishing school could be smart, but consolidating ten years later might be a mistake.

All borrowers should take time to understand the federal direct consolidation process and how it might impact their loan repayment strategy.

Getting Full Credit for Payments

During the course of repayment, borrowers may change repayment plans, have a deferment, change jobs, and switch servicers. All of these changes can make it more difficult for servicers to have an exact tally of payments towards forgiveness.

Borrowers need to make sure they are tracking forgiveness progress. Borrowers that don’t know where they stand will be unable to identify if their loan servicer has made an error.

For borrowers chasing after Public Service Loan Forgiveness (PSLF), the best tool is an employment certification form (ECF). Submitting an ECF will trigger a review of a borrower’s progress towards loan forgiveness and provide the borrower with an exact count of certified payments towards the required 120.

Borrowers working towards forgiveness on an income-driven repayment plan may have to work a bit harder. Because the IDR plans provide forgiveness after 20 years at the earliest, there are even more records to track. Borrowers going this route will want to keep records of payments and track their progress. If there is a dispute in the payments made, it will help to have bank statements and loan records.

Ideally, borrowers shouldn’t have to worry that a gap in payments will mess up their progress towards student loan forgiveness. Unfortunately, one of the bigger risks is that a loan servicer will make an error in calculation, possibly due to the gap. Borrowers should be proactive and keep detailed records so that they can prove they are eligible for forgiveness when the time comes.

The post Repayment Gaps and Student Loan Forgiveness appeared first on The Student Loan Sherpa.

What am I going to do?  How am I going to afford these payments?

The first thing I normally tell borrowers in this situation comes as a surprise to many: Deferments and Forbearances are lousy options and not being able to get one might be for the best. Lenders who advise a deferment are often guilty of giving bad advice.

Why are Deferments and Forbearances Bad?

The only thing a deferment or a forbearance accomplishes is a temporary delay in payment. A borrower is simply kicking the can down the road to deal with at a later time.  

The problem is that each time payment is delayed, handling the debt becomes more difficult. This is because interest still accumulates on most loans during both a deferment and a forbearance.

The temporary break in payments comes at a high price. I typically only suggest a deferment or forbearance for borrowers that will be starting a high paying job in the next six months or less.

Finding a different strategy that will work in the long-term might be a little bit stressful, but it marks a very important first step. Instead of just getting by for the next month, most borrowers are able to find a path to entirely eliminating student loan debt. This can be an attainable and monumental step forward.

The process for moving past a cycle of deferments/forbearances will depend upon the loan type.

Federal Student Loans: Qualify for low or even $0 payments

One of the main reasons federal student loans are regarded as the best student loans is the existence of income-driven repayment plans.

Unlike most other debts, borrowers actually have the option to make payments based upon what they can afford, rather than what they owe. For borrowers with smaller incomes and large debts, income-driven repayment can keep things under control.

Best of all, income-driven repayment plans provide all borrowers a path to student loan forgiveness.

A Note about $0 Payments: A monthly payment of zero dollars per month definitely sounds too good to be true… especially if it might lead to student loan forgiveness.

The reality is that Congress has created repayment plans to allow borrowers to make payments based upon what they can afford to pay rather than what they owe in total. No special negotiating or connections are needed. Borrowers simply enroll in an income-driven plan and depending upon income, they may have $0 payments.

Parents with Parent PLUS loans are also eligible for an income-driven repayment plan, but there is an extra step involved in enrollment.

Finally, it is worth noting that there are many income-driven repayment plans, including: Income Contingent Repayment (ICR), Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE). Before starting enrollment in an income-driven repayment plan, it is a good idea to review the pros and cons of the various available plans.

Private Student Loans: Be the Squeaky Wheel

There is an old adage that fits this situation well: The squeaky wheel gets the grease.

The cost of servicing student loans is high. Training call center representatives — even lousy training — is expensive. The quicker lenders can get through calls the more profits they will generate.  

Sharing this nugget of information is important because borrowers need to know that they are not getting the full picture in many circumstances.

Lenders simply don’t invest the time and the resources necessary to provide quality detailed advice to everyone who calls.

Being the squeaky wheel means calling multiple times and asking for help getting affordable payments. The goal is to get monthly payments that you can actually afford. Making huge payments for a couple of months until you go broke won’t help things.

As an example, one program that can be of assistance is the Navient Rate Reduction program. This repayment program allows Navient borrowers in difficult financial circumstances to get interest rates temporarily lowered.  

Other lenders have similar programs. These are not advertised by lenders because they want them to be reserved for the borrowers that truly need them. The advantage of a lower interest rate is that it allows borrowers to make smaller payments and start paying down the balance of the loan. Enrollment is not a right under most loan contracts, so it requires persuading Navient to help you out. Borrowers that earn too much to qualify for this form of assistance, may have to refinance their loans in order to get a lower interest rate.

Once borrowers are able to lower interest rates, they can focus on aggressive student loan repayment in order to eliminate the debt.

If multiple efforts at securing lender assistance don’t lead to results, it might be time to file a complaint against your loan company.

One of the best ways at getting results is to file a complaint with the Consumer Financial Protection Bureau. When borrowers file a complaint, the lender is usually required to respond. Because it is being handled within the structure of a consumer-friendly government agency, the playing field is more fair to borrowers. We’ve put together some tips on how to file a complaint and get the most from the process.

Private lenders have a well-deserved reputation for being difficult to work with, but because there are many potential routes to working something out, most borrowers can avoid loan delinquency and default.

Final Thoughts

A deferment or forbearance is a quick fix to a long-term problem.

The goal for any borrower should be to come up with a plan to eliminate their student debt.

Running out of forbearances and deferments may seem like a negative when it first happens, but it could be for the best in the long run.

The post Out of Deferments and Forbearances? What to do next… appeared first on The Student Loan Sherpa.