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What is Loan Forbearance?

Student loans can be eligible for loan forbearance, which is when the repayment plan is modified from its original terms.
Past due amounts cannot be collected during loan forbearance.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 23 September 2014
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Loan forbearance is a situation in which a lender allows a debtor to deviate from the payment plan described in the original terms and conditions of the loan, at least for a short period of time. During the period of forbearance, the lender does not make any attempt to collect the past due amount. However, should the debtor be unable to bring the account up to current status by an agreed upon date, the lender is free to pursue collection of the total loan amount.

Just about any type of loan is subject to forbearance. Banks and other lending institutions may grant this temporary financial arrangement on mortgages, car loans, and even student loans. As long as there is a reasonable expectation that the debtor will be able to bring the loan current within a specified period of time, most lenders will consider the possibility of forbearance.

There are a number of reasons why lenders choose to grant a loan forbearance. Often, the situation has to do with an unexpected change in the finances of the debtor. This may involve the loss of a job and an ensuing period of unemployment. During that time, the lender may choose to accept reduced monthly installment payments on the loan, or even grant a short period of deferment in which the debtor does not have to pay anything. In both cases, the expectation is that the debtor will recover financially within a given period of time, and bring the loan current.

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Both lenders and debtors benefit from the utilization of loan forbearance. Debtors receive some short-term relief from the pressure of attempting to keep up a payment that can no longer be managed. During this period, the lender does not make any attempt to collect on the debt. Many lenders will not report the forbearance period to credit reporting bureaus, and continue to classify the debtor as being current, which means that the debtor’s credit report does not reflect a negative line item.

Lenders often avoid spending a great deal of time and expense in collecting the debt. Because the loan forbearance is a simple arrangement between the two parties, there is no need to utilize costly legal action. Choosing to grant a period of forbearance to a client who has remained current up to the point when the financial reversal occurred can actually save the lender money. As long as the debtor regains a firm financial footing and catches up the payments in accordance with the terms of the forbearance, the business relationship can continue to the mutual benefit of both parties.

It is important to note that not every debtor is automatically entitled to a loan forbearance. Lenders typically consider the specific circumstances that surround the situation. For example, if the debtor is habitually late with payments before the current financial reversal takes place, there is little chance that the lender will be open to the idea of reduced or delayed payments, even for a short period of time. By contrast, a debtor who has always paid on time and proactively contacts the lender as soon as the reversal takes place has a much better chance of receiving this type of temporary financial arrangement.

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subway11
Post 4

@Sunny27 - I had a friend that recently considered a forbearance for her student loan and she told me that it was not that easy to get. She told me that for the Perkins Loan forbearance you have to meet certain qualifications before they even consider your request.

First, the loan payment must be 20% or more of your total income. They also will allow a forbearance if you develop health problems or are caring for someone that is disabled.

If you are granted forbearance you still have to pay the interest accrued during that time and the typical time frame that they will allow for this forbearance is twelve to thirty-six months.

I doubt that they will offer a forbearance because you decided to study something else. Maybe if you continue studying they will not have you begin making payments, because you are still in school but I am not sure about that.

Sunny27
Post 3

@Latte31 -I know what you mean. I think that you really have to be realistic about what your initial earning potential might be so that you don’t run into a situation where you have to request a loan modification or student loan forbearance.

You also have to think about your field and honestly assess if you want to work in the field that got your degree in. I have heard of people getting law or even medical degrees decide after they have spent $150,000 or more that they want to work in a different field.

I think that is really hard to deal with and in order to avoid such a problem it is best to volunteer in the field that you are interested in to make sure that you want to make that investment. I don’t know how the forbearance option works if you shift gears like that and go into another field.

latte31
Post 2

@Bhutan - I heard that too. I also wanted to add that student loans cannot be eliminated in a bankruptcy so if you are placing the loans in forbearance and then considering filing for bankruptcy then you will still have to pay the student loans.

I think that a lot of students run into these problems because the costs of college tuition are so high. There really should be some personal finance classes in high school to prepare students for college expenses.

By understanding the finances behind a college education you are more likely to view the degree as an investment and will choose wisely.

While obtaining a degree from certain prestigious schools might make the candidate more marketable it should be noted that the average CEO has a bachelor’s degree from an average university with C grade point average.

So success is more about your drive and ambition and what you do with your talent then where you get your degree.

Bhutan
Post 1

I just wanted to add that a financial advisor that I was listening to on television was saying that when someone requests student loan forbearance they will not have to make any payments at the moment but they do accrue additional finance charges so the balance will be even larger when the borrower resumes payments.

So although the bank is giving the borrower a temporary break on the payments, they are also charging them more interest in the meantime. After learning this I would do everything in my power to avoid a forbearance student loan.

It might be better to take on an extra job then let these loans go to forbearance.

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