If you’ve read my previous article on deferment and forbearance, then you’ll know that if you find yourself in difficult financial circumstances, there are options to deal with your student loans. Unfortunately, those options differ enormously depending on whether your student loans are federal or private.
For federal student loans, you’ve got a lot of flexibility. You may be able to defer your loans if you are unemployed and receiving unemployment benefits. Deferment is great because it allows you to postpone your payments, and interest that accrues is not added back to the principal until the deferment period ends. You just have to fill out a simple deferment application and, if you qualify, you’re approved. There are generally three years of economic hardship deferment available for federal student loan borrowers.
Economic hardship forbearance is another option for federal student loan borrowers. You don’t need to be receiving unemployment benefits to qualify, so it often is a good option for recent graduates who haven’t landed a full-time job. The biggest downside to forbearance is that, unlike deferment, interest is added back to the principal during the forbearance period. That means that your loan balance can grow more quickly the longer you remain in forbearance. However, forbearance is easy to obtain (no application required) and, like deferment, you have up to three years available.
Private student loans are a whole other ballgame. Private student loans in general have much more limited flexibility than federal student loans. Deferment is rarely an option, and forbearance is quite limited. If forbearance is available, your loan balance can rapidly balloon because private student loan interest rates tend to be higher than those of federal student loans.
To make matters worse, private lenders often take advantage of borrowers in untenable situations by forcing them to jump through hoops and pay fees. For example, many private lenders will require borrowers to complete complicated financial hardship applications showing all sources of income and all expenses, in order to determine “eligibility” for forbearance. This is, of course, a tedious exercise for an individual juggling several low-paying jobs or trying to find employment. Some private lenders will make borrowers re-apply for forbearance every few months, thus forcing borrowers to go through this process over and over again while they are dealing with the burdens of unemployment or under-employment.
On top of that, private lenders may even charge forbearance “fees.” To even begin the tedious forbearance application process, a borrower in financial distress may have to pay flat fees ($50, $100, sometimes more), money that does not go towards the loan in question but goes right into the pocket of the commercial lender. These borrowers are thus hit twice financially: first for the forbearance fee, and then for the interest that accumulates during the forbearance period.
Unfortunately, there’s just not a whole lot that can be done about this. Private lenders have a lot of power, and there is inadequate government regulation. To read more about how some are fighting back on this, check out this article.