Student loans can be a massive burden on college graduates. As a result, many of them are looking for ways to get out of their debt. Hence, there are two options that student loan holders should know about: Forbearance and forgiveness. This article will explain what each option means, as well as how it can help you avoid defaulting on your student loans.
What is student loan forgiveness?
Student loan forgiveness is a program offered by the United States federal government and some state governments that allows student borrowers to have their loans discharged or canceled, which can happen after they meet specific requirements for employment in public service positions. There are also other circumstances where it might be possible to get your student loans forgiven. These include when you work as an attorney providing legal assistance to low-income individuals; teaching full-time at a school serving students from low-income families; working as either of those with AmeriCorps VISTA (a division of the Corporation for National & Community Service); performing qualified military service; filing for bankruptcy due within five years of receiving your discharges on qualifying federal education debt; if you can prove that your total national education debt exceeds 20 percent of your annual gross income; or when you are a victim of identity theft and have been granted relief by the U.S. Department of Education on qualifying student loans.
What are the benefits of student loan forgiveness?
There’s a lot to be gained from getting your federal education debt forgiven! First, you can get all or part of your remaining principal balance discharged (canceled) when you meet specific requirements for employment in public service positions. There are also other circumstances where it might be possible to get your student loans forgiven.
These include when you work as any of the following
- An attorney providing legal assistance to low-income individuals.
- Teaching full-time at a school serving students from low-income families,
- Working as either of those with AmeriCorps VISTA (a division of the Corporation for National & Community Service);
- Performing qualified military service;
- Filing for bankruptcy due within five years of receiving a discharge on qualifying federal student loan debt, or if you can prove that the total percentage of all federal student loan payments is more than 20 percent of your annual gross income.
What are the drawbacks?
The student loan forgiveness program has many benefits, but there are some downsides to consider as well. The biggest drawback for most borrowers is the length of time to begin receiving your borrower relief. You must make 120 monthly payments on your loans (ten years) without falling behind to qualify, which could take a long time.
It also depends on how much money you owe; more than $60,000 means that while qualifying payments will be lower ($0 per month), they won’t reach the necessary total until after ten years have passed since your first payment was due. In addition, if you work for an eligible employer but don’t meet all other requirements, then none of your debt may be automatically forgiven. Finally, it is possible that when your loans are forgiven, you might have to pay income tax on the amount or receive a check for the balance due.
What is student loan forbearance?
Student loan forbearance allows borrowers of federal education debt to temporarily stop making monthly payments on their loans or reduce what they owe by either extending the term of their loan term (up to 12 months) or reducing their scheduled payment amounts. This forbearance can be helpful if you’re not able to make your regular payments because of any of the following:
- Job loss;
- Illness in yourself and family members;
- Serving in an AmeriCorps position at least half time ;
- Performing qualified military service as defined under U.S. Department of Defense guidelines;
- Filing for bankruptcy within five years from the date you received your discharges on qualifying federal education debt;
- If you can prove that the total percentage of all federal student loan payments is more than 20 percent of your annual gross income.
There are two types of forbearance programs: mandatory and discretionary. First, forbearance due to unemployment, economic hardship, or serving in AmeriCorps positions is a compulsory program that the U.S. Department of Education will generally grant as long as you meet eligibility requirements. The second type – discretionary forbearance – is approved on a case-by-case basis by your loan servicer, which can differ from the entity you borrowed money through.
Most forbearance periods last for up to 12 months, with a possible extension of another 12 months if specific eligibility requirements are met. If you can’t make your monthly payments and want assistance from the federal government, consider applying for deferment or forbearance. You should also be aware that some private lenders don’t offer these options. Check with your lender before using it for patience.
What are the drawbacks?
The biggest drawback of forbearance is that it only helps with monthly payments and does not help make up missed or late ones. In addition, if you were to fall behind while using this option, any delinquency would be added to your principal balance, making it even harder to repay in future payment periods.
You should also know that interest will continue accumulating during a period of forbearance unless certain conditions apply (such as military service). There’s another thing: Forbearance isn’t available for all loans—only federal government loans and some private loans.
What are the differences between loan forgiveness and student loan forbearance?
First, it is essential to understand that there are many similarities between these two options as both defer payments on federal education debt. The primary difference lies in how they define who can qualify for each program. Loan cancellation or forgiveness only applies to federal student loans and is available only for certain professions. It doesn’t matter what kind of loan you borrowed, whether it was subsidized or unsubsidized (in most cases), how much money you owe, nor does your credit score factor into this decision.
The best way to determine which option may be right for you is by understanding the eligibility requirements. For example, if you’re seeking forgiveness for your loans because of an illness in the family, job loss isn’t a factor, and forbearance wouldn’t be necessary. However, there are many situations where both types of the moratorium would apply.
Don’t delay making payments on your student loan- even when it seems like you can’t afford to.
There are several different repayment plans available for people who have federal student loans.
Loan forbearance is when you don’t make your regular payments on the loan but instead make reduced or temporary payments that will need to be made up later by extending the term of your existing loan or reducing how much money you owe each month.
Forbearance doesn’t reduce what you owe; it just allows you some time before making total payments. If there’s an interest rate associated with the original terms of your federal education debt, then this amount continues accruing while they aren’t being paid back in full.
The continued accrument means that during any period where deferment applies and reverts to standard payment schedules, you could find yourself with larger monthly payments if it extended your original loan term.
Which one should you choose when in debt to student loans?
When choosing between student loan forgiveness and forbearance, it depends on your situation. If you’re struggling to make ends meet, then forbearance can be a good option, but only for those who qualify.
Otherwise, if you have enough money or other assets that could be used toward repaying the debt, such as equity in your home (as long as the amount isn’t greater than $500,000), then income-based repayment might be better. But, again, it is because there are no deadlines after which all of your loans will be discharged.
Suppose you do not work directly with students (teaching or helping them). In that case, though, forgiveness is still possible even if payments aren’t being made through an income-driven plan—provided that ten years pass without defaulting. After this time, the remaining balance will be forgiven.
Why might people want to go with forbearance or forgiveness?
People would choose forbearance because it allows them to hold off on their monthly payments for 12 months. This program might be helpful to those who have lost jobs and are waiting for unemployment benefits or if they’ve suddenly become ill and can’t work.
If you’re still employed, your employer may also qualify you for a temporary reduction in what you owe through an income-driven repayment plan. These plans allow the borrower’s payment amount to be determined by annual discretionary income (the difference between adjusted gross income [AGI] and 150 percent of the poverty guideline) rather than average amounts based on loan type. They usually result in lower monthly payments that will shorten repayment time overall.
Forgiveness could be another option since this method won’t require the borrower to make any payments, though it can take more than ten years for all of your loans to be forgiven.
What’s the bottom line?
It is best to explore all options available when considering federal student loan forgiveness, forbearance, and consolidating/refinancing before making any decisions. If you’re struggling with monthly payments on education debt, then consider a moratorium or an income-driven repayment plan that might help prevent delinquency and default.
Remember that certain kinds of public service jobs may provide benefits not offered by private companies, such as tuition reimbursement for employees—so if you work in some public service job, be sure to ask about these advantages! Knowing all there is known about both types (forbearance vs. forgiveness) may help you decide what best fits your needs.