How Does Student Loan Forbearance Affect Credit Scores?

By Taylor Milam-Samuel
Reviewed by: Lauren Bringle, AFC®
Published on: 08/13/2020

Whether you’re struggling with making payments on your student loans due to job loss, unexpected medical expenses or family illness, it’s terrifying to realize that you’re unable to make payments. But forbearance might be a helpful option for you. So, what does loan forbearance mean and how can it help? This article is here to guide the way.

In this article

Growth of student debt

College students are graduating with more student loan debt than ever before. In fact, according to the Federal Reserve, the amount of student debt owed by American households more than tripled, from about $340 billion to more than $1.3 trillion between 2001 and 2016.

Even though the average amount of debt has ballooned to $28,650, most students have every intention of paying back their loans. But unfortunately, circumstances outside of their control can affect graduates’ abilities to repay their debt.

Do student loans affect credit score?

Student loans can also contribute to your overall credit score. Just like other forms of debt, a student loan can affect your FICO credit score, especially if you are making late payments. That’s why it is essential to make an on-time monthly payment if you are trying to build your credit score. Or, if you are unable to do so, see if you qualify for loan forbearance.

What is loan forbearance?

So, what does forbearance mean in student loans? Loan forbearance is the process of pausing your student loan payments. A forbearance agreement is available for all federal student loans, but usually doesn’t apply to private student loans. However, if you want to check, contact your loan issuer directly to see if a student loan forbearance applies to you.

“Other loan types might allow you to pause payments, but I haven't seen any terms nearly as generous as with student loans. You can pause payments for a year at a time, up to three years total. You can even consolidate loans and get another three years. What other loan type can you not pay for six years?” Travis Hornsby, CFA and founder of Student Loan Planner, explains.

How forbearance works

Here’s what you need to know about a forbearance agreement:

  • You must apply for forbearance and the loan servicer needs to approve your request.
  • You must meet the eligibility requirements.
  • You can only apply for twelve months at a time, for a total of three years.

During your loan forbearance period, you do not need to make payments towards your loan, but your loan will continue to accrue interest and the interest is added to your total loan amount. This is important because forbearance could add thousands of dollars to your loan.

But regardless of the interest, it might still be worth it.

“Forbearance is a good option to consider if you have a lot of credit card debt or no emergency fund. Both of these financial goals are more important than compounding your student loan interest,” says Hornsby.

There is also mandatory forbearance, which functions the same as regular forbearance except that your lender must approve the request of the borrower. The eligibility requirements for mandatory forbearance are slightly different and include things like being enrolled in a medical or dental residency program or serving in an AmeriCorps position.

The difference between deferment and forbearance

Student loan deferment is like forbearance in that you have to meet eligibility requirements — enrolled in graduate school or graduated from a higher education program within the last six months — and that you don’t have to make payments towards your loan once you’re approved.

But there’s one big difference: during the deferment period, your loans do not accrue interest for the borrower. Because of that, loan deferment is preferable, if you have a choice.

Does forbearance affect your credit score

If you’re experiencing a money emergency, forbearance might be a great way to stay afloat while you deal with the emotional and financial fall out. Even though forbearance won’t affect your credit score, it might affect other parts of your finances.

“It doesn't really have an impact [on credit scores], but lenders do look at it. For example, if you're applying for a mortgage and you're in forbearance, they'll take 1% of your loan balance and use that as your monthly payment in determining what you qualify for. If you're in an income driven plan then they'll use that payment, which is probably far lower,” says Hornsby.

In fact, while student loan deferment might appear on your credit report, it won't negatively impact your credit history like a missed or late payment would.

Is forbearance right for you?

If you are experiencing financial hardship — job loss, medical bills, unemployment, or a family emergency — and are unable to pay your monthly loan payments, then forbearance is a great option.

It’s one of the greatest perks of federal loans, and there’s nothing wrong with taking advantage of a benefit that exists to help you.

Student loans during Coronavirus

As the world – and your job situation and income – reels from Coronavirus, you may wonder if there are any relief options for student loan payments right now.

If you have federal student loans, you’re in luck. During COVID-19, the federal government is taking steps to provide support for borrowers. Those steps include:

  • Automatic forbearance. While this was originally set to end on September 30th, it was recently extended until January 31, 2021.
  • Waiver of interest (effectively a 0% interest rate) during the same period, so no interest will accrue
  • A pause in garnishment and debt collections

Read more at Nerdwallet and Student Loan Hero, as well as the federal student aid site.

If you have private student loans, you need to contact your loan provider directly to learn your options.

Here’s a rundown of your options for federal student loans during COVID-19.

1 - Temporary 0% interest

Effective starting March 13, 2020, all student loans owned by the US Department of Education will have interest waived through Sept. 30, 2020.

As of August 2020 though, President Trump issued an order extending this student loan relief through December 31, 2020.

As of December 2020, the relief was extended to January 31, 2021.

If needed, the government may extend this deadline to provide extra relief to borrowers.

Waived interest applies to:

  • Direct loans
  • Federal Perkins Loans
  • Federal Family Education Loan (FFEL) Program loans held by the Department of Education

__Note: This does not mean your monthly payments will go down. __

According to Federal Student Aid:

“Your monthly payment will remain the same, but the full amount of the payment will be applied to already accrued interest and/or outstanding principal. This means that you are likely to pay your balance down more quickly during this zero-interest period.”

How to get this: For federal loans managed by the government this is being automatically implemented so the new interest rate should not require action from you. But it never hurts to check with your specific loan provider to make sure.

If you can, keep making payments to take advantage of the 0% interest rate and pay off as much of your loan as possible.

2 - A different type of forbearance

With the CARES Act signed into law on March 27, 2020, your federal student loan payments were automatically postponed through September 30, 2020, starting from March 13, 2020 due to the Coronavirus.

This relief has now been extended through January 31, 2021, meaning your next required federal student loan payment is not due until February 1, 2021.

This is also known as “non-capping administrative forbearance.”

According to student loan provider Navient:

“Forbearance is an option that temporarily postpones payments on your loan. With a non-capping administrative forbearance, the interest that has accrued during the forbearance – which may be 0% as long as the interest waiver is in effect on your federally owned loans – will not be capitalized (added to your principal balance).”

In most cases, this COVID-19 related forbearance is automatic, but you should check with your loan servicer to be certain. Omitted from the legislation were Perkins loans and commercially-held FFEL loans, according to Inside Higher Ed.

Should you request loan forbearance during COVID?

Here are some questions to ask yourself to help you decide…

  1. Have you lost your job or had income reduced due to COVID?
  2. Do you have an emergency savings?
  3. Could that savings cover basic necessities (rent, food, etc) and student loan payments for the next few months, even without another paycheck?

If you answered yes to the first question, and no to questions 2-3, talk to your student loan lender about your options.

Even if you have enough savings to cover basic necessities, student loan relief could give you the peace of mind (and wiggle-room) needed to get back on your feet.

Read this for help prioritizing what debts to pay first.

Investigate other options

Forbearance and deferment aren’t the only alternatives for making your student loan payments work. If needed, consider Income Driven Repayment Plans, or making cuts in other areas to make ends meet during the tough times.

About the author

Taylor Milam is a personal finance writer who has also written for Credit Karma, Chime, Acorns and Policy Genius, among others.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.

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Written on August 13, 2020
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