A new GAO (Government Accountability Office) report is warning student loan borrowers against taking forbearance on student loans for any extended period of time.
A forbearance agreement is way to postpone payments to avoid defaulting on student loans when borrowers are hit with a difficult financial situation. Forbearance is offered to borrowers in 36 consecutive month increments to keep their accounts in good standing.
While this may sound like a heck of a deal, the catch is that student loan interest continues to accrue during the forbearance period. The longer a borrower is in forbearance, the deeper in debt they go, prompting the GAO to raise the alarm.
To illustrate the hardship caused by extended periods of forbearance, the GAO describes one borrower who took a forbearance on a $35,0000 loan. Three years later, the borrower had accrued $10,000 in interest on top of the original amount. A stinging revelation to the borrower who said “she would be paying it off the rest of her days”.
According to experts, your best bet is to steer clear of forbearance arrangements beyond a few months. Borrowers who are struggling with payments long term should make arrangements with their loan servicing companies to tie monthly payments to income and family size instead.
Keep in mind, however, that interest still accrues so the moment a borrower can afford to make higher payments, they should. And just in case you are told that loan balances are forgiven after 20 to 25 years if they cannot be paid off, that too has a catch – income taxes will be owed on any amount forgiven.
Student loan debt is typically part of a larger debt problem, some of which can be solved in bankruptcy. While student loans are typically not dis-chargeable in a chapter 7 bankruptcy, many other unsecured debts are, which may free-up additional income to help you tackle your student loan debt. Contact the Peoria Bankruptcy Law Offices of Charles E Covey for free consultation to discuss whether a chapter 7 or 13 bankruptcy is a good strategy for you and your family today at 309-674-8125.