When Student Loan Forbearance Is a Good Idea

The Student Loan Ranger usually counsels student loan borrowers against taking forbearance -- arranging to temporarily not mak e payments -- and for good reason. With that said, though, forbearance exists for a reason, and there are certain times when using this tool is truly the best option.

So, how do you know when to use forbearance versus other options? Let's look at what it means and when it is a good idea.

[Ask these four questions before requesting a student loan forbearance.]

What Is Forbearance?

Forbearance is a tool that federal and many private student loan holders use to temporarily put payments on hold. It can also be used to take care of past-due payments retroactively as long as the loan is not already in default.

The problem with forbearance is that interest still accrues on all loans, even subsidized Stafford loans, and if you do not pay the interest, it is capitalized -- or added -- on to the principal balance at the end of the forbearance period. This means that borrowers who use forbearance end up paying interest on top of interest, which isn't good.

The capitalizing interest can also cause your monthly payment to increase because of the larger balance, depending on your payment plan . So if you can't afford your student loan payments today, you may have an even harder time affording them once the forbearance has concluded.

The other downside of forbearance is that it can make it more difficult for struggling borrowers to get back on track for the long term. Over the years, we've noticed that borrowers who make their first year's worth of payments on time tend to be the ones least likely to default down the road. We believe this is due to creating a habit of repayment.

Just like your rent, mortgage payment or car payment, you've developed a habit of paying those every month and generally don't think twice about it. Once you break a habit, like taking a break from the gym or taking forbearance on your student loan, it can be much harder to recreate that habit.

[Understand student loan forbearances and rehabilitation payments.]

When Should You Use Forbearance?

Even with all the negatives associated with forbearance, this option can still be a financial lifesaver. If you are in a position where you are about to default on your loan and can't afford to make any payments, this is exactly the time to use this tool.

If your federal student loan is fewer than 270 days past due, you can call and request a forbearance via the phone and your loan holder can process the request immediately. Assuming you have the time available on your loan, the loan holder can use forbearance to clear up your past-due payments and put future payments on hold for up to a total of 12 months per forbearance.

If your loan is 270 or more days past due, which is the legal definition of default on a federal student loan, and has not yet been transferred to a collection agency, you can still call your loan holder and have a retroactive forbearance placed on the account back 120 days. From there, the loan holder can resolve the rest of the delinquency with a written forbearance or through other methods.

The point of this option is to give you a little bit of breathing room before the default point of no return. Remember, default means that you are no longer eligible for forbearance, deferment and lower payment options.

It also means significant collection costs are being added and the loan is due in full immediately. Having forbearance available to pull a loan back from the brink is extremely valuable and can save struggling borrowers thousands of dollars in the long run.

[Know when it's OK to postpone your student loan payment.]

When Forbearance Isn't an Option

One thing to remember is that these types of forbearance are discretionary. In other words, loan holders have no obligation to grant them and will only do so if you recommit to repaying your loan.

Most federal loan holders offer a total of between 24 and 36 months over the life of the loan. Private student loan lenders offer much less time, usually only in three-month increments, and will sometimes charge a fee to use them. This is another reason that we counsel borrowers to only use forbearance as a last resort, since you will want to make sure you still have the time available to pursue this option in a financial emergency.

While we still strongly recommend a lower payment option, such as an income-driven plan or interest-only plan, over postponing payments altogether, do not ignore forbearance if it's the only tool preventing you from defaulting or having a negative credit reporting due to your past-due loan.

Betsy Mayotte, director of consumer outreach and compliance for American Student Assistance, regularly advises consumers on planning and paying for college. Mayotte, who received a B.S. in business communications from Bentley College, responds to public inquiries via the advice resource "Just Ask" and is frequently quoted in traditional and social media on the topics of student loans and financial aid.