If you're struggling to pay back federal student loans, then forbearance may seem like a really attractive option. With forbearance, you stop making payments on your loans -- often for a long while. Forbearance is typically granted for a year at a time, and you can keep putting your loans into forbearance indefinitely if you're facing financial challenges.
While this may seem like the solution to your problems, it can be an extremely expensive one, because your loan balance grows while your loans are in forbearance. It also doesn't help you work toward loan forgiveness. Instead of sticking your loans into forbearance and letting them grow, it can be a far better solution to sign up for an income-driven repayment plan.
Income driven repayment plans vs. forbearance
There are multiple income-driven repayment plans available for most types of federal student loans. These plans include:
- Revised Pay as You Earn: Payments are capped at 10% of discretionary income. You'll owe payments for a maximum of 20 years, or 25 if any of your loans were obtained for graduate or professional study.
- Pay as You Earn: Payments are capped at 10% of discretionary income, but can't exceed what your payment would be on a standard 10-year repayment plan. You'll make payments for a maximum of 20 years.
- Income-Based Repayment: Payments are capped at 10% of income if your first loan was taken after July 1, 2014, or 15% if you had loans before then. Payments can't exceed the amount you'd owe on a standard 10-year plan. If your first loan was taken out after July 1, 2014, you'll have to make payments for a maximum of 20 years; otherwise, you'll owe for 25 years.
- Income-Contingent Repayment: Payments are capped at the lesser of 20% of discretionary income or the amount you'd owe on a fixed 12-year repayment schedule (adjusted based on your income). You'll make payments for a maximum of 25 years.
When you hit the 20- or 25-year maximum payment period on your loan, any outstanding balance is forgiven -- you won't owe money any more. If your income is low enough during your repayment period, your payment could end up being $0 -- but any months of $0 payments still count toward hitting your maximum timeline.
Forbearance, on the other hand, means payments are paused entirely.
You can qualify for mandatory forbearance -- your federal loan servicer must allow you to pause payments upon your request -- if you're doing a medical or dental internship; serving in AmeriCorps or the National Guard; working in a job that qualifies you for Teacher Loan Forgiveness; or have payments exceeding 20% of monthly gross income.
If you don't meet these criteria, you can still request general forbearance. Federal loan servicers usually approve it, but don't have to.
Why is an income-driven payment plan a better option?
If you put your loans into forbearance, your payments are paused, but the accrual of interest isn't. Since interest keeps accruing and you aren't making payments, your loan balance grows.
On a $30,000 loan at 6% interest, one year of forbearance leads to $1,800 in interest accruing on your loans. When this interest goes unpaid, it's added onto the balance you owe in a process called capitalization. Your new loan balance is $31,800. Paying your loan back is harder because the balance is higher, and you'll now get stuck paying interest on that $1,800 in capitalized interest and on the initial amount you borrowed.
Interest accrual doesn't stop when you've chosen an income-driven payment plan, either. If your payments aren't covering the interest cost each month, your loan balance will keep growing. But you'll still make progress toward completing the required number of payments for your loans to go away.
If you keep your loans in forbearance for three years when your income is really low, those three years won't count toward the 20 or 25 years of payments before the remaining loan balance is forgiven. If you'd chosen an income-driven payment plan instead, your payments might have been as low as $0 -- just as they were when your loan was in forbearance -- but you'd have just 17 or 22 years left to pay until loan forgiveness.
Even if you end up increasing your salary substantially later and paying off your loan before qualifying for forgiveness, you won't have lost anything by choosing an income-driven repayment plan instead of forbearance.
When you're on an income-driven repayment plan, you're also working toward Public Service Loan Forgiveness (PSLF) if you're in an eligible job. The remaining balance on your loans gets forgiven after 120 qualifying payments if you work for the government or an eligible nonprofit while making them. When your loans are in forbearance, that time won't count toward meeting your 120-payment requirement for PSLF.
Don't make a costly mistake with your federal student loans
When you're already having a hard time making federal student loan payments, the last thing you need is for your loans to get bigger and bigger as they sit in forbearance. Instead, sign up for an income-driven repayment plan. Your monthly payments should fit easily into your budget, since they're equal to a capped percentage of your income and you can make progress toward getting your loans forgiven instead of just watching your balance rise.