Many borrowers end up with gaps in their student loan repayment.
Sometimes a break in payments can be the result of a simple accident, such as a missed payment. Other times, a financial hardship may force a borrower to take a deferment or a forbearance.
These gaps in payments can impact the student loan forgiveness clock for programs like Public Service Loan Forgiveness (PSLF) and the various income-driven repayment plans. Fortunately, in most cases, borrowers will not have to start over in their march towards forgiveness.
The Forgiveness Clock and Breaks in Payments
The general rule is that a break in payments will not count towards student loan forgiveness.
On the Federal Student Aid page for Temporary Relief, the Department of Education explains that “[i]f you’re pursuing loan forgiveness, any period of deferment or forbearance likely will not count toward your forgiveness requirements. This means you’ll stop making progress toward forgiveness until you resume repayment.”
However, there are a couple of notable exceptions. The payment pause during Coranavirus should count towards forgiveness. Additionally, the Federal Student Aid page for Income-Driven Repayment does state that an economic hardship deferment will still count towards the required 20 or 25 years necessary for income-driven repayment forgiveness.
Arguably the most important detail for borrowers who take a deferment or a forbearance is that the clock does not reset. It merely pauses. Even though we normally talk about forgiveness coming after 10, 20, or 25 years, the more accurate way to say it would be 10, 20, or 25 years worth of payments. In other words, it is a monthly tally that loan servicers will be looking at when making decisions on qualifying for forgiveness.
Forbearances and Deferments Should Still Be Avoided
Even though a forbearance or a deferment doesn’t mean starting from scratch on forgiveness, it doesn’t mean that a forbearance or a deferment is a good idea.
In the vast majority of cases, loans on a deferment or forbearance will continue to accumulate interest. At the end of the payment break, the accrued interest is added back to the principal balance. This step is called interest capitalization. Thus, at the end of the payment pause, the borrower has a larger loan balance.
For this reason, borrowers usually are better off sticking with an income-driven repayment (IDR) plan during a financial hardship. Months on an IDR plan count towards forgiveness, and payments can be as low as $0 per month.
Federal Direct Consolidation and the Forgiveness Clock
When we talk about resetting the student loan forgiveness clock, the biggest danger is probably federal direct consolidation.
The federal direct consolidation process pays off an old loan and creates a new loan. As such, the new loan starts at the beginning for the purposes of forgiveness.
There are cases where federal direct consolidation is a smart move. However, there are also cases where it could be a huge mistake. Additionally, timing is very important. Consolidation right after finishing school could be smart, but consolidating ten years later might be a mistake.
All borrowers should take time to understand the federal direct consolidation process and how it might impact their loan repayment strategy.
Getting Full Credit for Payments
During the course of repayment, borrowers may change repayment plans, have a deferment, change jobs, and switch servicers. All of these changes can make it more difficult for servicers to have an exact tally of payments towards forgiveness.
Borrowers need to make sure they are tracking forgiveness progress. Borrowers that don’t know where they stand will be unable to identify if their loan servicer has made an error.
For borrowers chasing after Public Service Loan Forgiveness (PSLF), the best tool is an employment certification form (ECF). Submitting an ECF will trigger a review of a borrower’s progress towards loan forgiveness and provide the borrower with an exact count of certified payments towards the required 120.
Borrowers working towards forgiveness on an income-driven repayment plan may have to work a bit harder. Because the IDR plans provide forgiveness after 20 years at the earliest, there are even more records to track. Borrowers going this route will want to keep records of payments and track their progress. If there is a dispute in the payments made, it will help to have bank statements and loan records.
Ideally, borrowers shouldn’t have to worry that a gap in payments will mess up their progress towards student loan forgiveness. Unfortunately, one of the bigger risks is that a loan servicer will make an error in calculation, possibly due to the gap. Borrowers should be proactive and keep detailed records so that they can prove they are eligible for forgiveness when the time comes.