STUDENT LOANS: REPAYMENT IN TIMES OF FINANCIAL DIFFICULTY

One day, you are in the middle of a financial hardship. Unfortunately, you still have student loans to pay. What will you do? In times like these, the federal government designed two options to address the financial difficulty of its borrowers: deferment and forbearance. First and foremost, the federal government’s ultimate goal is to never let its borrowers default on student loans because of temporary financial setback.

Deferment

It pertains to a period in which repayment of the principal and the interest of the loan is temporarily deferred. During deferment, a borrower needs not to pay, and depending on the type of loan he has, the federal government may bear the loan’s interest, which is applicable to Federal Perkins Loan, Direct Subsidized Loan, Parents PLUS Loans, and/or Subsidized Federal Stafford Loan.

This is obtained by individuals who cannot repay their loans due to circumstances such as unemployment or incapacity to find a full-time job for three years, economic hardship including Peace Corps service, returning to school, and active military duty. The wartime active duty deferment is only allowed for loans awarded after July 1, 2001.

However, deferment has one catch: Since it is reviewed before approval and it is not automatic, one has to still repay until deferment has been granted on the person or he will be charged fees for late payments. And missing payments can end up with a default on the loan.

To apply, download the form from the lender’s website or request for it. The request should be submitted to the organization where you make loan payments.

Forbearance

This is an alternative option an individual can consider in case his deferment application is not approved and he cannot make his scheduled payments. A borrower can halt making payments or cut down his monthly payment for up to 12 months. Although one does not need to present any proof of financial difficulty, your lender will determine whether to grant forbearance or not. During this period, interest will continue to accrue on subsidized and unsubsidized loans.

There are two kinds of forbearances: discretionary and mandatory. For discretionary forbearance, the lender decides whether to give forbearance or not. An individual can request this in the event of an illness or financial hardship.

On the other hand, a person can request for mandatory forbearance if 1) serving in a medical or dental hardship, or residency program and has met specific requirements; 2) serving in a national service position in which you receive a national service award; 3) total amount of payment every month for all the student loans is at least 20% of your total monthly gross income (additional requirements apply); 4) performing a teaching service qualifying you for teacher loan forgiveness; 5) National Guard member and have been activated by a governor, but you are not eligible for a military deferment; and 6) qualified for partial loan repayments under the Department of Defense Student Loan Repayment Program.

Such financial difficulties are inevitable and beyond our reach. So it is important to create a safety net that will cover six to eight months of expenses. Having an emergency fund can help a borrower get back on track or recover faster from financial hardship. Otherwise, default on student loans to cut off most of your repayment options and hurt your credit rating. By doing so, not only your deferment or forbearance options are taken way, but also you won’t be able to secure a new financial aid from the US government.