When someone runs into financial difficulty, such as a job loss, demotion, or pay cut, the first solution they think of for their student loan payments is to ask for a deferment or a forbearance based on financial hardship. That way they think they're safe because they don't have to make a payment for 12 months and won't go into default. What they don't realize is, they've actually made their situation worse!

How Could a Deferment or Forbearance Make Things Worse?

There are actually at least two situations in which things could get worse. The first has to do with interest capitalization, and the second with the Public Service Loan Forgiveness Program.

You Will End Up Owing More!

Any student loan in a forbearance, and anything but a subsidized federal loan in a deferment, results in interest capitalization. What this means is, that although you do not have to make a payment (which is applied to principal and interest), interest during that time continues tp accrue and, when you eventually come out of the forbearance or deferment, that accrued interest gets permanently added to the principal balance of the loan. That's right; you come out of the forbearance or deferment owing more than you did when you went in!

A subsidized federal loan does not do this because the interest is paid (subsidized) by the Department of Education.

You Will Get Behind on Public Service Loan Forgiveness

If you work full time for a public entity, charity, or qualifying nonprofit, then you may be on track to have any federal loan balance forgiven after you have made 120 payments while so employed. That's a great way to get a loan paid off in ten years that could not be done under a standard repayment plan.

But if you are in a forbearance or deferment, you are not making any payments, and as such, are not getting any closer to the finish line on loan repayment. If you stay in hiding for the maximum time, that's another year added on!

So What Is the Solution?

If your income has been reduced through a demotion or pay cut, or eliminated due to job loss, then the best solution for a federal loan is to get into a repayment plan that will give you a payment commensurate with your income, even if that income is $0.00! These Income Driven Repayment (IDR) plans can be a lifesaver, as it keeps you in repayment, even if the payment is $0.00 per month (which is possible).

If you have a New Jersey CLASS loan, HESAA has been working with people to lower payments to be more in line with income. Negotiating something with them and keeping payments on track is certainly preferable.

I Can Help!

Most of this is possible by filling out and submitting forms to your loan servicer, which is certainly something to do yourself. However, there are different IDR options with federal loans and different types of loans have different payment plans available. It can be confusing, and you don't want to end up choosing the wrong one!

If you live in New Jersey, are having difficulty making your student loan payments due to job loss or income reduction, realize that you need help, and are ready to take action, then call me at 856-432-4113 to schedule an appointment for an analysis of your situation.

If you would like more information about student loans, you can download my free book, I Graduated; Now What? A Guide to Dealing with Your Student Loans.

Have a New Jersey CLASS loan? Then check out the information in my free book, Paying for Your Classes with a CLASS Loan: A Survival Guide to HESAA. It will tell you about all of your options and which one might work for you!

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Steven J. Richardson
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Bankruptcy, Collections, Student Loan, DUI and Traffic Court attorney in Woodbury, NJ.

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