Student loan refinancing may or may not have forbearance depending on the lender. Refinancing terms, conditions, and interest rates vary widely from one lender to another.
One important thing to know is when you refinance federal student loans, they convert into private loans. The federal government doesn’t offer refinancing, so you can only refinance with a private lender. The refinanced private loan has none of the benefits associated with the original loan. This includes the forbearance option, which is associated with all federal student loans. The refinanced loan may or may not have forbearance depending on the lender.
Forbearance is a solution offered by lenders to borrowers who are experiencing any type of financial hardship. It allows the borrower to postpone or reduce their student loan payments for a specified period of time. During this period, the borrower doesn’t have to pay anything towards the loan principal. However, interest continues to accrue on the loan. It is usually added to the balance when the forbearance period ends. Some lenders may capitalize the accrued interest.
All federal student loans have the forbearance option but not all private student loans come with this protection. Before signing any refinancing agreement, ask the lender if they offer forbearance. Also, ask them about the terms and fees associated with this option. Some lenders may offer a partial forbearance option that requires you to make interest only-payments during this period. Others may offer full forbearance but for a very short period only. Most lenders charge a flat fee for processing forbearance requests. Make sure to find out about the fees as this also adds to the cost of the loan.
If you don’t have a steady job or a decent income, it’s advisable to refinance only with a lender who offers this option. You never know when you may need it.
#1. Forbearance may suspend the payments temporarily but it doesn’t suspend the accrual of interest. Interest keeps accruing on your outstanding balance right through. This will add to the cost of your loan.
#2. When you apply for forbearance, it may take the lender some time to process the request. You must continue to make your original monthly payments until you receive formal notification that your forbearance has been granted. Stopping payments before receiving the notification counts as missing a payment. You will be charged a fine for the missed payment. If the payment is delayed for more than 30 days, your credit score will also take a hit.
#3. Even if a private lender offers forbearance, the terms and fees are generally not as borrower-friendly as federal student loan forbearance. The forbearance is much shorter and the fees tend to be higher.
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