Forbearance costs student loan borrowers more than they expect
This article looks at how forbearance can end up costing student loan borrowers a lot more than they expected.
Many college graduates struggle to keep up with their student loan payments, which is why borrowers often opt for a forbearance. Forbearance allows borrowers to delay repayment of their student loans by up to three years. However, as Forbes reports, the forbearance program has been criticized for being abused by colleges, who have a financial incentive to get more of their graduates into forbearance. What many borrowers don’t realize or fully appreciate is that after their forbearance period is over their monthly student loan payments will likely increase substantially.
College accountability and forbearance
Many colleges receive federal funding and that funding is partly determined by what is called their “cohort default rate.” Essentially, the cohort default rate means that if a certain percentage of a college’s graduates default on their student loans within three years of graduation, then that college could lose access to federal aid.
As a result, colleges have a financial incentive to prevent students from defaulting on their loans, at least for the first three years after they have graduated. Forbearance allows students to delay their student loan repayments for three years, which means that colleges benefit if borrowers who are struggling with repayments opt for forbearance rather than default on a payment.
According to the Government Accountability Office (GAO), many colleges are hiring “default management consultants” who are encouraging students to opt for forbearance. The GAO says that these consultants typically contact borrowers to urge them to request forbearance. Many consultants are accused of unethical behavior, such as telling borrowers that if they default on their loans they will lose their food stamp eligibility (which is not true).
Risks of forbearance
The problem with forbearance is that it only artificially reduces the default rate so that colleges are still eligible for federal aid. After the forbearance period has passed, borrowers are often shocked by how much more they owe in student loans. For example, CNBC shows how postponing $30,000 worth of debt substantially increases the amount owed. With a loan term of 10 years and an interest rate of 5.7 percent, a borrower would owe a total of $39,000 if they didn’t postpone repayments. However, if they opted for a three-year forbearance then the total amount they would owe would be $46,169.
Forbearance is certainly a worthwhile option for some borrowers, but it is not the only one. While colleges may prefer their graduates to opt for forbearance, other repayment options, such as income-driven repayment plans, may make more sense for many borrowers.
Help with debt
Student debt is out of control and borrowers across the country are struggling. For those who are finding their debt situation overwhelming, it is important to talk to a bankruptcy attorney as soon as possible. An attorney can advise borrowers about what options they have so as to get them back on their financial feet as soon as possible.