What Is Forbearance?

Loan Forbearance Explained in Less Than 5 Minutes

A homeowner looks over her mortgage forbearance paperwork.
•••

Marko Geber / Getty Images

Forbearance occurs when a lender allows a borrower to temporarily stop or reduce payments on a loan. There are many types of loan forbearance. It can apply in a variety of lender/borrower situations. It is often used with student loans.

Learn more about the types of loan forbearance, the specifics of each, and what to know before you ask to pause payments.

Definitions and Examples of Forbearance

If you borrow money and then face hardship, you can ask your lender for forbearance. If the lender agrees, they will pause or reduce your payments on a temporary basis. At the end of the agreed-upon period, you will resume payments.

Alternate name: Loan forbearance

Types of hardships can be wide-ranging. They can include medical emergencies, permanent disability, job loss, temporary unemployment, natural disaster, divorce, and more.

For instance, from March 13, 2020, to Jan. 31, 2022, federal student loan borrowers are being placed in an administrative forbearance. During this time, federal student loan payments are automatically paused. However, people can choose to make payments if they wish.

How Does Forbearance Work?

The key to forbearance is that it is temporary. The length of time that a lender will allow forbearance varies. But, it is a maximum of three years before the borrower has to start making payments again.

Forbearance can help by:

  • Extending the term of the loan
  • Postponing the payments on the loan
  • Reducing the payments on the loan

One important characteristic of forbearance is that interest continues to accrue during the pause. If you are able, you may choose to keep paying the interest during the forbearance period. If you don’t, the interest will be added to the principal of the loan. This will mean that you pay more in total interest paid over the life of the loan.

Types of Forbearance

There are three main types of loans for which you might get forbearance:

Student Loans

Student loans may be the most commonly deferred loan type. This kind of loan debt has become increasingly burdensome. Former students with outstanding loans are more likely than not to place their loans in forbearance at least once. The latest statistics available are for 2013 which show that 32% of student loans were never in forbearance, 48% were in forbearance for less than 18 months, and 20% were in forbearance for more than 18 months. By November 2020, over 22 million former students were in forbearance with direct loans totaling close to $887 billion.

If you are thinking about applying for student loan forbearance, it's important to know the risks. Remember that you will be responsible for paying the increased interest costs that accrue.

Forbearance should not be a way to put off repayment. It is not a long-term strategy to make loan repayment more affordable and should be only the solution to some emergency.

There are two types of forbearance for former students and their student loans:

  • The first is discretionary or general forbearance. It is available to just about anyone with any kind of financial hardship. It should be a last resort.
  • Another type of student loan forbearance is mandatory forbearance. This type is available if you are in the National Guard and are deployed, if you are in a medical residency or internship program, or if your payment is more than 20% of your monthly income. It's called "mandatory forbearance" because your loan provider is required to give it to you under these circumstances.

Mortgage Loans

If you have a mortgage and run into financial hardship, you may be eligible for forbearance on your loan. Banks and other lenders know that homeowners can run into difficult financial times for many good reasons.

You and your lender will work together to determine if you qualify for forbearance. You will also discuss the terms of the agreement, including how long the forbearance period will be, how much your payment will be reduced, and how much you will repay the lender.

You may have to repay the lender at a higher interest rate, but forbearance will help you avoid foreclosure on your home. It could also save your credit score.

Once the forbearance ends, you have to repay the principal, interest, taxes, and insurance on your home per your forbearance agreement.

Credit Card Debt

During the Great Recession of 2008-2009, credit card default rates rose. During the first and second quarters of 2020, they rose again. Missing payments and paying late fees can tank your credit. Many banks that issue credit cards have forbearance programs that can offer you some relief. If you are experiencing hardship, call and ask for their credit counselors. They may be able to help you with a forbearance application.

Key Takeaways

  • Forbearance is when a lender allows a borrower to temporarily stop or reduce payments on a loan.
  • Types of hardships include medical emergency, disability, job loss, natural disaster, divorce, and more.
  • There are three main types of loans for which you might get forbearance: student loans, mortgage loans, and credit card debt.
  • Forbearance can save your credit and help you avoid other penalties, but it can also mean higher payments over time.