How Does Student Loan Forbearance Affect Credit Scores?

How does student loan forbearance affect credit scores?

By Taylor Milam

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.

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 able to help.

What is loan forbearance?

Loan forbearance is the process of pausing your student loan payments. Forbearance is available for all federal student loans, but usually doesn’t apply to private loans. However, if you want to check, contact your loan issuer directly.

“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 forbearance:

  • 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 your request. 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. Because of that, loan deferment is preferable, if you have a choice.

Forbearance and 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.

About the Author

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

Written on February 13, 2019

Self is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@self.inc.

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