What is Forbearance?

Published by Thomas Herold in Banking, Laws & Regulations

'Forbearance' is explained in detail and with examples in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Forbearance refers to a debt default solution mostly utilized for student loan borrowers who cannot make consistent payments every month on their student loans. In some cases, a borrower may be able to qualify for a forbearance, or otherwise a deferment, on the federal student loans. This would help the borrower to postpone entirely (on a temporary basis) or even to permanently reduce the monthly amount due. The goal with either of these scenarios is to help the former student borrower avoid sinking into default on the student loan.

Forbearance should never be confused with deferment. With deferment, the arrangement made is for a temporary delay in paying back the principal balance on the student loans. The government could choose to pay the interest on these loans while they are in deferment. Sometimes qualifying for deferment can be an automatic feature if the student borrower is still enrolled at least half time in a qualifying post-secondary level university or college. If the borrower’s income is minimal or if he or she is performing service for the community or in the military, he or she might also automatically qualify. Requesting such a deferment is a matter of contacting the financial aid office for the college or university which was attended alongside the loan servicer or lender. It is ultimately up to them to provide the borrower with the necessary paper work in order to successfully complete the request for deferment.

Forbearance is the other option which is popular when student borrowers are unable to qualify for such a deferment. Forbearance simply means that the borrower receives permission from the lender to halt payments for a time or otherwise to reduce the monthly amount of the payments on qualifying federal student loans. This can be given out for a term of as long as 12 months. One must also qualify for forbearance. Assuming one is approved and receives this forbearance, he or she will still have the interest continuing to accrue on top of the unsubsidized and subsidized student loan principal balances.

It is far easier to be approved for forbearance than for deferment. Yet forbearance also costs the student borrowers a higher amount of money in the end as the interest continues to accrue without mercy. Interested student borrowers also must contact the loan servicer or lender in order to apply for this status. The lender or loan servicer will naturally request and require a certain amount of paper work in order to process such a request.

As one might expect, there are both pros and cons to forbearance. In the pros column, it will postpone the loan payments and be easier to qualify for in the end. In the cons, it means that interest continues accruing and being applied to the ultimate loan balance which must be paid back in the end, and so the borrower will repay more over the longer term than if he or she had not applied for it in the first place.

In general, any student borrower who is given a choice to pick between this forbearance and deferment will nearly always opt for deferment. Deferring student loans is a free pass on interest while the person is trying to finish schooling or find a high paying job. Forbearance is what borrowers apply for when they have no better options for which they can qualify. At the least, it will succeed in postponing payments or in reducing the monthly amount which the student borrower must make in minimum payments. Either case is better than sinking into the otherwise unavoidable status of default on the student loans in question.

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The term 'Forbearance' is included in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.