Many people here in New Jersey who cannot pay their federal student loans seek to hide from the problem by getting a deferment or forbearance. Although this can be helpful if you need to buy a short amount of time to get an administrative discharge or apply for an income based repayment plan, it can have a bad effect in the long run.
What bad effect is that? The accrual and capitalization of interest! What you might not know is that while you are in a deferment or forbearance, interest on the loans continues to accrue. It then capitalizes into principal, thus making your loan balance much higher! The only exception to this would be a subsidized Stafford loan in a deferment.
How Bad Could It Be?
Let's take an example. Suppose you have $50,000 in student loans at 6.8% interest. None of them are subsidized and you enter into an economic hardship deferment for a year. In that year, however, $3,400 will accrue and add on to the balance!
Naturally, this is preferable to defaulting on the loan, which adds another 18.5% to your loan balance, so that additional $3,400 for the forbearance is better than the extra $9,250 that a default would add.
Deferments and forbearances are never the solution to your student loan problem. They just kick the can further down the road while increasing your debt. you need to have a plan to deal with your loans in the long run.
So What Do I Do?
If you live in southern New Jersey and would like to consult with me on your loans, please feel free to call my office at 856-432-4113 or contact me through this site to schedule an appointment in my Woodbury office to discuss your case.
If you would like more information about student loans, you can dowload my free book, I Graduated; Now What? A Guide to Dealing with Your Student Loans.