According to the regulations, forbearance of federal loans involves a loan holder agreeing to a “temporary” stoppage of payments, an extension of time for making payments or acceptance of less than the full amount due. The key term in the foregoing definition is “temporary”.
Over the last year, I have had the opportunity to talk with many people who have student loan debt. A fair amount of them have told me that they could not afford their federal student loan payment, called their servicer, and were put into a forbearance. Some have told me that they have been in a forbearance for two or three years. Wrong.
That’s just not me talking. Recently, the Consumer Financial Protection Bureau (CFPB) sued Navient, the largest servicer of student loans for, among other things, steering borrowers into forbearance rather than analyzing their situation and directing them to a more appropriate repayment plan. Why is forbearance not appropriate? Well, first of all, interest accrues during the forbearance period. That could be up to 5 years for Direct and FFEL loans and three years for Perkins loans. Borrowers come out of forbearance owing sometimes more than 150% of what they owed when they entered forbearance. More importantly, when the borrower leaves forbearance, that interest is capitalized into the unpaid principal. At that point, the borrower is paying interest on interest.
Why do servicers do this? Since we have not had testimony in the Navient case, we do not know their rationale or excuse. However, some of the opinions include that it makes life easier for the servicer- many forbearances are granted over the phone. Also, many proprietary schools (for profit) place students in forbearance to avoid defaults especially during periods when their default rate is being monitored by the government.
What should you do if you cannot afford your federal loans? Well, you could consider an income driven repayment plan. This would make payment affordable (in some cases $0) and you still get credit toward loan forgiveness.
Are there any circumstances where a forbearance is a good idea. Yes if the forbearance is temporary. An example would be that you are close to default date, have applied for an income driven repayment plan, and are awaiting a decision which can take up to 90 days. Rather than slip into default, it would be wise to obtain a forbearance until the decision is made.
Be smart in dealing with your federal student loans. There are options out there. Reach out for help. An experienced student loan attorney can be of real help.