I have fortunately been able to make on-time repayments for my federal student loans every month since they went into repayment. So, I was only a little confused when I got a letter in the mail from my loan servicer telling me that a “delinquency forbearance” had been placed on my loans.
It turns out that it is standard practice to put a customer’s loans into forbearance when they request a change in repayment terms. When I called this morning to ask what the forbearance was all about I was told they do this in order to “keep the account current,” while the change is processed.
Here’s the problem with that. To a borrower, a forbearance might seem like an innocuous month off from paying your loans. Extra money in your pocket for a month is always good, and you changed your repayment presumably to get a lower rate so on the surface it seems like a good deal. It is, until you look up what it actually is and what happens during a forbearance period.
Not a deferment
There are two ways of delaying payment on student loans: deferment and forbearance. deferments are used to pause repayments for really specific reasons when it doesn’t make sense for you to be repaying your loans. For example, if you go back to school you can request a deferment on your existing loans. You can request one for up to three years if you are experiencing prolonged unemployment. One awesome part of deferments is that depending on your loan, the government might pay your interest for you. That means if you end up unemployed for three years after you graduate, you can stop payment on your loans and not worry about interest piling up and capitalizing.
A forbearance is much different.
With forbearance, you may be able to stop making payments or reduce your monthly payment for up to 12 months. Interest will continue to accrue on your subsidized and unsubsidized loans (including all PLUS loans). – studentaid.ed.gov
That last sentence is key, and according to the letter I got, not only does it accrue, but if you don’t pay it during the forbearance period, it capitalizes. Let’s say, like the average med student, you have $166,000 in student loan debt after you graduate (your principle) and you ask and are granted forbearance for a year right as your repayment begins. At 7.5% interest, your loan will earn $34.10 in interest every day during that period for a total of $12,446.50 for the year. And if you don’t pay it before the end of the year, it will capitalize – added to the $166,000 principle. So now your post-graduation debt is $178,446.50. This means once you go back into repayment, your payments might be higher than you planned.
Even if the forbearance period is shorter than a year, it could still be long enough to accrue enough interest to cancel out a monthly payment you already made. When a loan servicer signs its customers up for an automatic forbearance to “keep the account current” while they process repayment requests, they’re signing us up for a whole lot more than a month off of paying our loans.
On top of all that, the interest rate award for enrolling in autopay is suspended during forbearance, so you will be earning interest at a slightly-higher-than-normal rate. It’s like rubbing salt in the wound.
Borrower’s have rights
According to the Department of Education’s materials, the borrower must request a forbearance or deferral. The “automatic” in an automatic forbearance means the servicer is obligated to grant it if the borrow meets the requirements. And that’s the way it should be. If a borrower cannot make payments, these are good options, but that’s a decision the borrower needs to make. A loan servicer should never be able to impose a damaging financial decision on a borrower, and they certainly shouldn’t penalize those who are making good on their payments.
As for the servicer’s need to keep the account “current,” if stopping payment for a month is truly necessary in order to apply a new payment plan, it should be a deferment, not a forbearance. Having a variety of payment plans is valuable because it gives us options that can meet our current financial needs. Since other methods of adjusting loans aren’t available to federal student loans – refinancing, discharging, etc. – it’s vital that these options be useful and not harmful to borrowers. Penalizing borrowers with capitalized interest is no way to reinforce these as good options.
Here’s the thing. Student loans are the worst and the system is incredibly opaque. There’s no consumer choice in the matter: I’m stuck with the servicer ED assigned to me. I have no idea if my monthly payment is going back to the Department of Education, my university, or simply lining the coffers of the the servicing company executives. The autopay system is such a disaster that for the first nine months of repayment I went into my account every day to make sure my payment was scheduled, went through, and the next month’s was queued up properly. Sometimes I even double paid accidentally. In a system so thoroughly stacked against the borrower, we don’t need more opportunities to fail.