Student Loans: Forbearance and Deferment

All right, associates, we're going to talk about more basic definitions. First, forbearance and deferment. Forbearance postpones your payment, and guess what? Deferment also postpones your payment. They're very, very similar in that sense. In fact, they're exactly the same in that sense. However, with forbearance, interest always accrues. With deferment, interest generally accrues. I'm going to talk about the differences a little bit, but I want you to keep in mind this, that forbearance should be used as a last resort. I'll even say deferment should generally be used as a pretty close to last resort, but forbearance always as a last resort. And interest is going to accrue quickly lead to eventual default. And remember that when you come out of forbearance, and even typically with deferment, the interest that accrued or built up while you were on forbearance or deferment will get capitalized at the balance of the loan and that portion of the interest is going to have to pay interest on that interest. So it's a very painful thing. So be very careful before you jump into forbearance. What I would say is rather than entering into forbearance, change to an IDR plan, an Income Driven Repayment plan, IDR pay or repay because it limits your monthly payments to 10% of your gross income. And so if you're, let's say you're unemployed, then your income is zero. Now you may say, well, Wes, I, I can't wait until next year when I recertify with my loan servicer and to see my loan payments dropped. Well, that's okay because guess what? You can essentially recertify as many times as you want to at any time you need to. You can contact your loan servicer, let them know I'm no longer employed and therefore my income is zero as of today. And your student loan payments will be zero going forward. So why would you not, why would you go on forbearance? Even if you're in, even if your income is next to nothing, your IBR pay and repay would essentially eliminate all or most of your student loan payments. And remember that while you're on forbearance and deferment, you're not getting any credit toward loan forgiveness. So if Your plan is PSLF 10 years, or the others 20 years, or pay 20, 25 years as you're on forbearance or deferment, the clock is not ticking on the Forgiveness. Let's look at a few features for these. Length, qualification, application process and interest rate. For length, the deferment depends on the type of deferment you're going on. Sometimes it's a month or two. Other times it can go up to three years. Forbearance, it's always no more than 12 months. Could be less, but not more. Now you may have a period of time where you go on forbearance, kick back in and you pay and then at some other point you go back on forbearance. But at any one point in time it's not more than 12 months. How do you qualify for deferment? Well, number one is for deferment is you have to apply for whatever it is the cause of your need for deferment. And that might be that you are unemployed or enrolled in school at least half time. But even then again, if you're unemployed, just stick on your IDR plan. For forbearance, a specific qualifying event usually is not even necessary. It can be a phone call. It's that easy. And the loan servicers, student loan servicers, they don't even question really, they just, they'll just do it. This is why so many people have gone into forbearance or deferment, especially forbearance, because it is so easy. It's just one single application or even a phone call because they think, oh, I don't need to pay my student loan payments and I'll have it forgiven at some point in the future. Well, that's not what I'm going to tell you to do. I'm going to tell you to own this and understand the consequences or the implications for going on forbearance. It just keeps you in that student loan bondage for longer. So we want to avoid that. What's the application process? Well, for deferment it depends on the, the form depends on the purpose for which you are going on deferment. And there's different forms which you can get from your student loan servicer. For forbearance is just the one form. And how is interest handled? Well, we address that interest accrues except for if you have a subsidized Stafford loans for your undergraduate degree and then interest may not accrue for that and the balance will stay the same. But for everything else, your unsubsidized loans, then your balance is going to go up on forbearance. No matter what type of loan it is, interest is always going to accrue. And then when you come out of it, that interest that accrued gets added or capitalized to the balance of your loan and now you're going to pay interest on that. From my prior module went from one bucket, the accrued bucket, to now the capitalized bucket. A few other definitions. Number one, grace period. Grace period is that time after you graduate when you have to start making payments. Typically that's about six months. And for your undergraduate degree, your Stafford subsidized Stafford loans, the interest actually doesn't accrue, which is kind of nice. But your dental school loans, that interest does accrue. And at the point in time when you hit that six month grace period, it actually capitalizes added to the balance of the loan and pay interest on that. But that's your grace period. Loan discharge is simply another way of saying your loan is now forgiven, you don't have to pay off the remaining balance of your loan and you can have your loan discharged for different reasons. And there's certain causes of physical nature, so disabled or you die. If it's a government loan, there are depending on the loan provisions around those loans being forgiven. If you're on PSLF after 10 years or if you're on the other IDRs after 20 or 25 years, it could be forgiven. That's called loan discharge. And there's different tax effects on that too, which I'll talk about in another module. Very important. And then your student loan servicers, that definition is simply those companies that the United States government has decided to outsource to or to hire to administer the repayment of your student loans. Now these are the people that you interface with when you need to recertify or make adjustments or go on deferment. This is who you're going to interact with. Let's talk a little bit more about those student loan servicers. Remember that these are not banks. This isn't Wells Fargo, this isn't bank of America. These are companies that are just administering a process of mechanics sort of back office function. And there's four big Navient, Nelnet, Fed Loan Servicing and Great Lakes. And you've probably heard of these and maybe you have loans with a few of these. You can have loan serviced from different loan servicers. Notice that Fed Loan Servicing as of today is the only one that does or services the Public Service Loan Forgiveness program. So if you want to get pslf, got to make sure you're having that managed by Fed Loan Servicing. I have a module on pslf. If you're planning on getting PSLF or that's what you want critical to listen to that. The statistics of success are unbelievably low and you should know why. So stay tuned for that important module. Now beyond these big four, which do about 80% of student loan servicing, not just dental, all student loan servicing. The other five, so there's nine total, are Mohela, Cornerstone Higher Education Services Corp. And Granite State and osla. Now if you got a loan from your local university, then they might be administering that loan, they might be servicing that loan. But all direct federal government loans are going to be administered by these nine as of 2020. Some provide very good customer service, or at least modestly good customer service. Others have the reputation for just not servicing very well, even though they're a servicer and you're going to interact with them. And I want you to remember this one important thing about your student loan servicer. They're not there to give you advice. They're there to process a request. And a lot of times their advice will be what will make their processing request the easiest. You always decide outside of them what's in your best interest and you go to them to make any changes. And believe me, the person you talk to, generally speaking, is not going to know the complexities of the different student loan programs, what causes capitalized interest, what you should do in your specific context. They're just not. So don't go to them for that. So that's a. It's really important to understand what the, what the student loan servicers do when you go to them, etc. Even though, for example, they'll let you go on forbearance right away, that doesn't mean you should go on for forbearance just because your student loan servicer allows that. In fact, that one thing is the reason why only around 50% of our student loan in our country are actually being paid. And I think that statistics are going to continue to get worse is a lot of people have gone on forbearance and deferment because it's so easy to do so well if you're a client of practice cfo, we want you to get out of student debt. We want you to succeed. So understanding these is very important. Stay tuned. We got a lot more coming your way.