“Ask Brianna” is a column of NerdWallet for 20-somethings or someone else starts. I am here to help you manage your money, find a job and pay off student loans, all in the real world stuff no one taught us how to do it at the university. Send your questions about postgrad life firstname.lastname@example.org.
Tolerance is a way to stop making student loan payments temporarily. It is not a long term affordability strategy, or a way to repayment for an indefinite period of time.
And that means that very few people should use it — probably many less than are doing now.
In the second quarter of this year, 2.8 million federal student loan borrowers had loans in forbearance, according to the U.S. Department of Education. Almost 70 percent of the borrowers who started repaying loans in 2013 used tolerance at any time in the next three years, according to the U.S. Government Accountability Office; a fifth had the loans in forbearance for 18 months or longer.
Many students do not really understand what they signed up for when they scrambled to afford an education that they were told that they needed to succeed. Tolerance is the quick fix they turn to when the bill hits them.
But if tolerance is not a good idea, what are the borrowers in trouble to do? Follow these guidelines:
— Use income-driven repayment on your loan payments more affordable in the long term.
— Choose a tolerance only for short, one-off financial crises, such as when you have a major car repair or medical bill to pay.
Here is why.
WHAT TOLERANCE IS
Tolerance allows you to pause payments, generally for up to 12 months at a time for the federal loans.
There are different types, but a discretionary forbearance is one that can creep up on you. It is available for anyone with financial problems, and there is no limit to how long you can get it. The interest will keep adding up, which means that at the end of the forbearance period, you’re more than you did before.
For example, after putting $ 30,000 in loans to keep for 12 months at 6 percent interest, you would owe about $31,800.
Think of patience as a last resort. It is too easy to refresh, and let your balance grow, while also spending per month, without taking into account in a student loan payment.
“Because tolerance can be applied to virtually any reason, you want to keep that for a possible emergency on the road, where you may not be eligible for anything else,” says Betsy Mayotte, president of the Institute of The Student Loan Advisors, a non-profit offers free student loan advice.
WHAT TOLERANCE IS NOT
Tolerance is not the same as delay, another way to stop making student loan payments.
Deferment is a better option, because you do not have to pay interest on subsidized loans for students, if they are in a delay. You will be eligible for deferral in certain circumstances, when you are unemployed, for example — so ask your student loan administrator if that is an option before you with patience.
Tolerance is not so easy to avoid when you have private loans. Private lenders generally offer few ways to lower payments, unless you have already fallen behind, Mayotte says. But it is worth it to ask for the interest-only or interest-free payments as an alternative.
SMARTER WAYS TO GET HELP
Most people with student loans have the federal loans, which means that they qualify for the income-driven repayment. These plans lower payments to a percentage of income; you can pay $0 if you have no earnings.
In order to qualify, some plans require you to show you can’t afford the standard 10-year schedule, but a plan for so-called Revised Pay As you Earn — is available to all federal borrowers. Sign up for free www.studentloans.gov.
Depending on the plan and the type of loans that you have, the government pays a part of the interest that is earned if your payments don’t cover it. Your loans will also be forgiven if there is a balance after 20 or 25 years of payments.
Result-driven repayment will help you through a crisis, but stay on it for decades will mean more in the spotlight. Under current rules, you will also be taxed on the balance forgiven.
Use income-driven repayment strategic by staying on it once you’ve found it more stable financial basis. You can pay extra per month without cost to get rid of your loans faster, and a lower payment, there is a safety net when you need it.
This is your chance to take back control of your loans, and to prevent them from dictating the life that you can afford.
– RELATED LINKS
NerdWallet: Deferment and forbearance: How to pause loans for students
Federal Student Aid: Income-driven repayment plan request