Understanding forbearance

By Erica Gellerman
May 14, 2020

If you’ve turned on the news recently, you may have heard someone mention forbearance. You may know what forbearance is. You may not. 

In a nutshell, forbearance is the temporary suspension of loan payments. Due to the current economic situation in the wake of COVID-19, many people are struggling to pay their bills without a lot of savings to fall back on. For these reasons, some lenders are offering relief to their customers in the way of loan forbearance. 

While forbearance is a good option if you won’t be able to make upcoming loan payments, you’ll first want to understand what this means for you. 

In this guide, we’ll review the things you need to know about loan forbearance, including what’s available for different types of loans, as well as what you should ask your lender about loan payments with forbearance. Read on to learn more. 

What is forbearance?

Forbearance is a way for lenders to provide relief to borrowers who are struggling to make monthly payments. Lenders may offer forbearance for a certain period of time (ex: 30 or more days) and you won’t be required to make your debt payments during that period. 

While forbearance can be a good option to keep your loans from going into default, there are drawbacks to it as well. And, it’s also important to note that forbearance provides temporary relief. You will still have to pay back the money that you borrowed and depending on the forbearance program, interest on your loan may still accrue. 

In addition, forbearance can lengthen the life of your loan, which means you may end up paying more in interest over the duration. For example, putting a pause on your loan payments for three months while interest still accrues means that you end up paying more in interest. 

Types of loan forbearance

There are two forbearance options available through the CARES Act: student loan forbearance and mortgage forbearance. If you have other types of debt, like credit card debt, personal loans, or auto debt, your lender may offer forbearance options as well. So, it’s a good idea to check with your bill companies to see what they offer

Student loan forbearance

Federal student loans are being temporarily placed on administrative forbearance from March 13, 2020 through September 30, 2020. During this period, borrowers are not required to make loan payments (though you still can if you want to). This forbearance is automatic, meaning you don’t need to ask your lender to put your loans into forbearance. 

Some loans during this period will set the interest rate to 0% (as of May 2020). These loans are:

  • Direct Loans
  • FFEL program loans
  • Federal Perkins Loans

More information about the student loan forbearance program can be found on the Federal Student Aid website. 

If you refinanced your loans or took out student loans through a private lender, they may offer their own forbearance options, so contact them if you need help. 

Mortgage forbearance

If your mortgage is backed by the federal government, the CARES Act allows you to pause your payments for up to 180 days. If that’s not long enough, you can ask for another extension for up to 180 days. Your regular interest will accrue, but you won’t be charged any additional fees for putting your loan into forbearance. 

Federally backed loans include FHA, VA, USDA, Fannie Mae and Freddie Mac loans. If you’re experiencing a financial hardship as a result of COVID-19, you’ll need to inform your lender to learn about forbearance options. 

If you’re not sure if you have a Fannie Mae or Freddie Mac loan, you can check using these lookup tools:

Other mortgages may also be eligible for forbearance, even if they aren’t backed by the federal government. For example, many banks, credit unions, and mortgage lenders in California are offering mortgage forbearance for up to 90 days, regardless of whether the mortgage is backed by the federal government. 

How do you get a loan forbearance?

Aside from federal student loan forbearance outlined above, if you’re looking for forbearance options, it’s best to ask your lender. They’ll be able to tell you what programs they offer and whether you will qualify. 

Even if you do qualify for forbearance, you’ll want to ask more questions to be sure you fully understand what you’re signing up for. Remember, forbearance doesn’t erase your debt — you will need to repay these missed payments eventually. 

Things to ask your lender:

  • Will interest continue to accrue? Some lenders are offering forbearance, but interest will continue to accrue even while you’re not making payments. In some cases, the interest may be added onto the outstanding balance of the loan and you’ll have to pay interest on the larger balance.
  • How will my skipped payment be repaid? Lenders may lengthen your loan term or they may require you to make larger payments for a period of time after the forbearance ends. Make sure to ask exactly how your payments will continue after forbearance so you can plan for that. 
  • How will my loan status be reported to credit reporting agencies? Will your lender continue to report that your loan is current or will your credit report show that you’re past-due on your loan obligations? Under the CARES Act, lenders are required to continue to report your account as “current” or whatever status it was before they agreed to loan forbearance. But it’s a good idea to double-check because you don’t want to tarnish your credit

Should you use a forbearance payment plan?

Forbearance payment plans can be a good option for temporary financial relief if you’re struggling to make your debt payments. But there are downsides as well. So, if you can continue making your loan payments, you may want to stick with your current payment plan. 

Whatever you decide to do, make sure you weigh your options so that you know what’s available for different types of loans.

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Erica Gellerman is a CPA, MBA, personal finance writer, and creator of TheWorthProject.co. Her work has been featured on Forbes, Money, Business Insider, The Everygirl, The Everymom, and Lifehacker.

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