Forbearance

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A forbearance is an agreement between a private party borrower and a lender in which the borrower is allowed to postpone payments temporarily due to financial or other hardship. While a loan is in forbearance, the interest on the amount continues to accrue, which increases the amount of the loan, or the amount of payments due when the forbearance comes to an end. Many borrowers request a forbearance to avoid going into default on their loan. Forbearances are often available to borrowers of student loans or those with other large loans, such as mortgage holders. To explore this concept, consider the following forbearance definition.

Definition of Forbearance

Noun

  1. An agreement to temporarily postpone or suspend a borrower’s payments.
  2. Tolerance and restraint.
  3. A refraining from enforcing something.

Origin

16th century refraining from

What is a Forbearance

When a borrower seeks a forbearance, he must contact the loan holder directly and without delay, especially if the borrower is at risk of going into default. While interest does continue to accrue during the forbearance period, financial and other costs associated with a defaulted loan can be much higher. While there are laws that require certain lenders to grant forbearances for a specified period of time, not all lenders are required to offer forbearance. Depending on the specific lender and type of loan, the borrower must meet certain requirements before a forbearance will be granted.

When Forbearance is Not a Solution

Forbearance is designed for borrowers facing short-term or temporary financial problems, therefore it is not a long-term solution for any borrower. For this reason, each lender has a set amount of time for which they grant forbearances, which may range from several months to several years. If the borrower has serious financial issues that are not likely to be resolved in that time period, other options should be considered, as once the forbearance ends, he will immediately be required to begin making regular payments on a larger loan amount.

Mortgage Forbearance

A mortgage forbearance is an agreement made between a borrower and mortgage lender in order to delay or prevent foreclosure when the borrower falls behind on payments. Often a borrower who experiences a job loss, injury, or other hardship cannot afford to may regular monthly mortgage payments, causing the lender to begin the foreclosure process. To keep from losing his home, the borrower may reach out to the lender to request a forbearance. If granted, a formal agreement will be drawn up, specifying the amount of time the borrower will have before being required to catch up the payments due.

Each mortgage lender offers different forbearance plans for borrowers seeking temporary relief. Some of the most common include:

  1. A full authorization to postpone payments until a future date
  2. A reduction of payment amount for a certain amount of time
  3. Payment of interest only for a specified time
  4. A temporary reduction of interest rate

The type of forbearance offered often depends on the circumstances, and is generally in the best interest of the lender, rather than the borrower. It may also depend on the loan balance, the rate, or the term of the loan.

Student Loan Forbearance

A student loan forbearance is often available to student borrowers who have taken out a federal loan to pay for college expenses. If a borrower has already defaulted on his federal loan, it is up to the lender whether to offer a forbearance. The borrower must meet certain criteria for a forbearance, including:

  • Facing financial hardship, or
  • An experiencing debilitating illness or injury

In some circumstances, the loan provider is required to grant the borrower a student loan forbearance:

  • The borrower is enrolled in medical school or residency
  • The borrower’s loan payment exceeds 20 percent of his monthly income
  • The borrower is serving in a national service position
  • The borrower is eligible for a Department of Defense repayment program
  • The borrower is performing qualifying duty in the National Guard during a war or national emergency

Federal Student Loans

The Federal Family Education Loan (FFEL) and Direct Loan service providers operate under federal guidelines, and the regulations pertaining to forbearance differ than those governing other lenders. When a borrower is approved for a forbearance due to poor health or other medical problem, he can request a forbearance for up to a year, after which he can continue requesting forbearance year after year. There is no limit to the amount of years he may qualify. These lenders are required to grant an income-based forbearance for borrowers in the low-income category for up to five years. Because interest on these student loans continues to accrue during forbearance, this can be a costly option for the borrower.

For example, Bob owes $10,000 on his student loan at a 5 percent interest rate. He qualified for a year-long forbearance, during which time the interest will accrue, since he cannot make the interest payments. At the end of the year, Bob’s loan amount will be $10,500, and should he qualify for another forbearance, interest will be calculated on the new total.

Sallie Mae Forbearances

Sallie Mae offers forbearance similar to other lenders. A borrower unable to make payments under his Sallie Mae loan should contact the lender as soon as possible to work out an agreement. The lender in this case may grant forbearance for only three months at a time, for a total of 12 months, and requires the borrower make a “good faith” payment of $50 to $150 (as of 2015) in order to receive a forbearance. The borrower may choose to make interest-only payments during forbearance, or may allow it to accrue and capitalize.

Forbearance Agreements

When a borrower and lender negotiate a forbearance, an agreement is drafted in which all aspects of the forbearance are stated. Forbearance agreements are sometimes referred to as “standstill agreements,” and are basically contracts to prevent lenders from enforcing a default while the lender is unable to make required payments. The forbearance agreement specifies the amount of time the borrower can postpone payments, and any other details, such as whether interest payments will be made during that time.

Once the details of the forbearance have been agreed upon, the actual agreement is drawn up. Until the agreement is in place, the borrower should continue making payments to avoid additional problems. Details included in a forbearance agreement may include:

  • Identifying and contact information for all parties
  • The reason for the forbearance
  • The terms such as the date when forbearance ends and how interest will be handled
  • Acknowledgement that the loan terms remain unchanged, and that the borrower is still responsible for the loan
  • The consequences should the borrower fail to make payments after the forbearance comes to an end

Forbearance vs. Deferment

The terms “forbearance” and “deferment” most commonly come up with reference to student loans. While both offer suspended payments for student loan borrowers, a deferment also suspends interest during the term of the deferment, and in certain types of student loan, the government may pay the interest during the deferment period. Because forbearance allows interest on the loan to accrue during the term, a deferment is the better option for borrowers.

Other Student Loan Options

For borrowers facing financial hardship, options other than deferment and forbearance may be available for student loan borrowers who cannot make their monthly payments. The borrower may request that the lender change their repayment plan to suit their income level. This is referred to as an Income Based Repayment Plan, and the amount of the borrower’s monthly payments is recalculated based on their income. By contacting the lender directly, the borrower can learn what options are best for his situation.

Defaulting on a Loan

Defaulting on a loan affects the borrower’s credit rating and future borrowing options. If a debtor goes into default, his options for remedying the situation are limited. In many cases, the borrower can be sued in civil court, facing wage garnishment or other actions in order for the creditor to recover the amount owed. Because of these consequences, it is vital for borrowers to keep in contact with their lenders and discuss any payment problems as soon as possible. In serious situations, some borrowers may consider bankruptcy, though student loans cannot be discharged in bankruptcy.

Related Legal Terms and Issues

  • Civil Lawsuit – A lawsuit brought about in court when one person claims to have suffered a loss due to the actions of another person.
  • Contract – An agreement between two or more parties in which a promise is made to do or provide something in return for a valuable benefit.
  • Creditor – A person or entity to which money is owed by another person or entity.
  • Debtor – A person who is in debt, or under a financial obligation to another.
  • Default – Failure to fulfill an obligation, or to appear in a court of law when summoned.
  • Mortgage – A legal agreement in which an individual borrows money to buy real property, such as a home, and agrees to pay back the money plus interest within a specified time period.
  • Obligation – A promise or contract that is legally binding; the act of binding or obliging oneself, as in a contract.