is a debt relief program. That has been introduced in 2021 by the Federal govt. to provide some relief to the students. Which are struggling to pay their study loan due to COVID 19 pandemic. So, let’s have a look at a bit of the detail related to the Student Loan Forbearance plan.
If you have decided that your college education is the right path for you, but just can’t afford the costs of going to school, then you may want to look into student loan debt relief. However student loan consolidation is one way that you can do this.
What Is Student Loan Consolidation?
Combing all your student loans into one loan is known as Student Loan Consolidation. However, the benefit of combining all the loans for students is that. Now they have to pay only one loan and that also to a single lender. Thus, students need not to remember and pay to multiple lenders every month.
But one of the benefits of loan consolidation is that, You have to pay a single loan now. That also with a lower interest rate as compare to all the loans. That you were paying earlier.
Advantages of And Consolidation
Student Loan Forbearance can help you get some time to pay off your student loan.
Loan Forbearance may help you get a low interest rate for your Study loans.
Forbearance can help you get into loan consolidations.
Student loan consolidations can let you club up your all the loans into one single loan.
You have to pay only one EMI, If you opt for loan consolidation.
Both Student Loan Forbearance and Consolidation can help you decrease your Interest rate.
Can I Get Modification For My Student Loan After Forbearance?
Well, one of the biggest advantages of the Loan forbearance is that you can easily go for modification. However, refinancing may not be possible in some cases. But to refinance, you must have some tangible assets at which the original loan had been passed.
Thus in Study Loans, the best a lender can offer is the modification. Hence, if you think that modification is even more beneficial for you. Because you get a chance to pay of a part of your loan at an ever more low interest rate as compare to consolidation.
Not only this but now you can pay of your loan even faster. So, you must opt for the modification as well, as soon as you are done with the Student Loan Forbearance.
How To Easily Qualify For A student loan forbearance?
You will find it easier to get a student loan forbearance if you are able to show a lender that you are currently enrolled in an education program that allows you to be deemed eligible.
Eligibility can be determined by your current monthly payment and the amount of time since you took out your loan.
Many students get a student loan forbearance after they graduate. The majority of lenders have loan re-evaluation provisions which allow them to re-evaluate your loan based upon your current status.
Lenders are willing to consider a student loan forbearance if you meet the requirements.
Student Loan Forbearance Vs. Deferment – What Is The Difference?
Many people hear the terms deferment and forbearance and really don’t understand the difference in terminology. However, it is true that with both of these you’re not paying your loans or your principal or interest back for a period of time.
But the ways that they could affect your loans are very different. That depends on the type of strategy you’re using and the type of loans that you have. So let’s see what are some of the differences.
What Is Deferment?
Deferment means that for a period of time you’re not paying the loan principle or the interest. However, you could be in deferment for a number of reasons:
You could be in school.
You could be an active-duty military personnel.
You could be someone who’s had a real financial hardship.
Last but not least, You may be someone with no job, or can’t find a job, or lost your job.
So, all the above reasons could affect your loan in a different way. Because the impact of Deferment and Forbearance also depends upon the type of loans that you have. However, before explaining the deferment and its reason we have to explain Subsidized and Unsubsudized loan. Just for a better understanding of the concept.
What Is A Subsidized Loan?
Subsidized loans are typically loans that are taken out for undergraduate studies. However with subsidized loans, while interest accumulates on your loans in periods of deferment, the government pays for the interest for you.
For example you are in a school and you’re taking out a loan of say $20,000. So when the interest accumulates on that $20,000, by the time you start repaying it. You won’t have to pay the $20,000 plus the interest. You will only have to pay the principal of $20,000 that is a subsidized loan.
What Is Unsubsidized Loan?
Well, Unsubsidized loans can be taken for graduate studies. But any interest that is accumulating at the time of deferment. Only the borrower will be responsible for the same. The government is not going to pay for you.
So for the sake of comparing the both type of loans. Let’s take an another example.
let’s say that you’re in a period where you owe $20,000 and you have an unsubsidized loan, during a period of deferment. You have the option of paying these with the principal or the interest, or you could decide to pay at the very least the interest that’s accumulated.
Why would you want to do that?. Well, here we have to introduce another term and that is Capitalization Of Loan Interest.
What Is Capitalization Of Loan Interest?
let’s go back to the person who owes $20,000. If they hold $20,000 in an unsubsidized loan, let’s say they’re in a period of deferment, and by the time they’re ready to start paying they find out that $5,000 of interest has accumulated on that loan.
If they have chosen not to pay back the interest during their deferment and they choose not to pay it back before their loan payments start. Then that interest will capitalize, meaning it will be added on to their principal.
So now instead of paying back $20,000, they will be paying back $25,000. But here, if we say that the borrower is paying the interest as well. That can be wrong, because the interest has already been added to the principal amount and now its the principal of $25000. That one has to pay.
You see if you have a standard repayment plan. Then whatever you’re paying is based off of what it will actually take to pay your loan balance off in full in a given period of time.
So if you started and took out $20,000 in loans and have a 10-year standard repayment plan. Then that payment that you’re offered is going to be what’s needed to pay off the $20,000 with interest in a 10-year period of time.
But if you have $5,000 of interest that’s accumulated and you let it capitalize. Well now the lenders are basing your 10 years worth of payments off of not $20,000 but $25,000. So, Just because of $5000 interest, it could take far more to pay off that loan which means you have a higher monthly payment.
If you’re in deferment with an unsubsidized loan and you have the option of paying the interest on that loan. Then it is worth considering, because if you don’t you could risk having a higher payments. That also when you come out of deferment and resume your payments in full.
Forbearance is similar to Deferment: In that, you have a period of time where you’re not paying the principal or interest, you’re not required to. But unlike deferment, many of the things that would lead someone to be in forbearance are centered on things such as financial hardships.
That’s why people who are in medical residences who don’t make enough to pay their loans are offered forbearance, or people who are active military personnel.
Types Of Loan Forbearance
There are two different types of forbearance.
Discretionary Forbearance:- means it is at the discretion of your loan provider. In simple words you submit a written request to make the lender aware of your situation and that loan provider determines whether or not they’re going to offer forbearance to you.
Mandatory Forbearance:- It means you are in a certain program or meet certain criteria. So that your loan provider can at least offer you Forbearance. For Example:- a medical internship, a dental residency, active military duty. These are some of the examples to which a mandatory forbearance has to be offered by your loan provider.
However, whether you want to take it or reject it is completely your call.
Difference In Deferment And Forbearance?
In deferment it doesn’t matter what type of loans you have: when you’re in forbearance, interest will accumulate on that loan and it will not be paid by the federal government. so we mentioned that with a subsidized loan you could be in deferment and not worry about the interest capitalizing before you start your payments.
But if you’re in forbearance it doesn’t matter what type of loan you have, by the time you start paying those loans, interest will have capitalized if you didn’t pay it during your time with forbearance.
So again if you find yourself in a situation. Where you already have an accumulated interest amount. You have to make the decision about paying it off. While saving for the back up.
Loan Forgiveness – Complete Details With Examples
Well, we are going to shed some light on Loan Forgiveness in the context of 3 payment based plans:
The income based repayment plan.
Pay As You Earn Plan.
Revised Pay As You Earn Plan.
So, if we have to explain about the core of this program. The lenders will be having a look at your earning capability and not at what you owe. So you may be asked to pay a percentage of your discretionary income. But when you do that there’s a possibility that all of your loans would not be paid off by the end of the repayment period.
How The Loans Are Forgiven?
If you get to the end of the repayment period and you have an amount of loan that is wiped away or forgiven. The the following year you’ll have to pay the income taxes on whatever has been forgiven by your loan servicer or by the federal government.
For example: let’s say we have a person who makes $75,000 a year and he have been paying on a income based repayment plan for 25years. So he have completely fulfilled the lender’s requirement of 25 years of qualifying payments under this program. That means that anything that’s left this year will be wiped away.
So let’s say at the end there are $25,000of loans that they still have that the federal government is going to forgive at the end of this period. So the next year when they file his income taxes, that is in coming April. He will not going to pay the taxes on his salary of $75000 only. But he will have to pay the taxes by including the forgiven loan of $25000 as well.
That means the total income on which one has to pay the taxes will be $75000 (Salary) + $25000(Loan Amount).
Pro Tip: It’s better to pay the taxes of $25000 forgiven loan than to pay the complete $25000.