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What is Forbearance in Student Loans? - Definition

Instructor: Michael Cozad

Michael is a financial planner and has a master's degree in financial services.

This lesson will provide an overview of student loan forbearance. Student loans affect students and graduates across the country, and the forbearance option will be explored in this lesson.

Overview

Student loans are intended to help students pay for their postsecondary education, which sounds like a good thing, right? However, these loans are fast becoming a problem for students and graduates alike. If you've watched the news lately, you have likely seen someone, somewhere talking about the student loan crisis.

After graduation, most students know that repayment will soon begin. As with almost any type of loan, in student loans, when the lender wants to be repaid, they contact the borrower numerous times and in various ways. However, if the person who borrowed the money is having difficulty repaying the loan, options to temporarily stop making those payments may be available.

Definition

That sounds awfully nice, doesn't it? If you had student loans, your first thought might be, 'I can stop making payments? Awesome!' The key word in the sentence, of course, is temporarily. Before we get too deep into the details, let's kick off this lesson with a definition.

Forbearance, at the most basic level, is when the lender permits you to stop making payments or even reduce monthly payments for up to twelve months. There are two types of forbearances: discretionary and mandatory. We'll explore those soon.

Example

Meet Carl von non-Monybag. Carl graduated from Stanford with his undergraduate degree in 1999, his master's degree in 2001, and doctorate degree in 2005. Carl, even with all of these degrees from Stanford under his belt, has yet to find a decent-paying job (in the year 2014). This is unfortunate for not only Carl, but for his student loan lender, too.

Carl found out yesterday that his job at the local coffee shop is not only reducing his pay, but his hours as well. He enjoys this job so he will not consider quitting. At the same time, his rent and his student loan payment is coming up. With no living relatives and few friends, Carl has found himself in quite the pickle, as he has no one he can turn to in this time of need.

When Carl learned about forbearance, he thought it might be a good solution for him. So he called his student loan lender, and the representative inquired as to whether the forbearance request was discretionary or mandatory. Carl was unsure, so he did some research.

Carl learned that regardless of how he answered the question, interest on his student loans would continue to accrue, meaning that just because Carl reduced or stopped making payments, does not mean the interest stopped being charged; instead, it would continue to accumulate.

Discretionary Forbearance

Carl learned that he is most likely applying for a discretionary forbearance. Discretionary forbearance is typically requested during periods of financial hardship or illness. The 'discretionary' part means the lender gets to decide whether they will allow you to stop making payments, reduce your payments, or deny your request. If the request is denied, the originally agreed upon payment amount is due.

Mandatory Forbearance

On the flip side, if Carl was in a certain type of situation, he may qualify for a mandatory forbearance, in which the lender would be required to grant Carl his request. The following situations result in a mandatory forbearance:

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