THE WALL STREET JOURNAL. JANUARY 31, 2013. When their student loans come due, many borrowers have no choice but to postpone the inevitable. As of March, 51% of student loans were in deferment or forbearance — periods when, owing to financial hardship, borrowers are not required to make payments — up from 44.3% a year prior, according to a study released today by credit bureau TransUnion. (These figures include deferments for students who are still in school.) And the amount they’ve postponed paying jumped 70% to $388 billion from March 2007 to March 2012.
Financial advisers have long hailed these two programs as safety nets for borrowers who become unable to repay their loans because of unemployment, underemployment or other circumstances. Rather than missing payments and defaulting, which would also ruin their credit score, borrowers are able to buy some time until they regain their financial footing.
While the temporary relief has helped many borrowers, the new data suggests that these student-loan protections could be hurting others — in particular those who leave their loans in deferment or forbearance for long stretches. In those cases, “it’s not a good fix because you’re just digging yourself into a deeper hole,” says Mark Kantrowitz, publisher of FinAid.org, which tracks student-loan debt.
The impact on lenders has so far been minimal. The federal government handles most of the loans in deferment or forbearance, and experts say the delays in payment could actually help it raise more revenue as many of these borrowers will owe more in interest. And if federal student loan borrowers end up defaulting, the government has other ways of getting that money, including garnishing wages and Social Security benefits. Read “How student loans could hit your Social Security. ”
Borrowers encounter several problems when they come out of long periods of deferment or forbearance. With the exception of subsidized federal loans, interest on student loans continues to accrue during these periods, so that when borrowers do eventually start repaying their loans, they’ll be facing a bigger balance than when they entered into these programs. Also, delaying repayment for a longer period increases the chances that they’ll carry this debt later on into life. That’s partly why the number of people ages 40 to 49 still repaying their student loans totaled 5.7 million during the first quarter of 2012, according to the latest data from the Federal Reserve Bank of New York. That’s up from 3.3 million seven years prior.
Furthermore, experts say that federal loans, which provide borrowers with more flexibility, could also derail borrowers’ efforts to make a dent in their debt. That’s because the loans permit nonpayment for a total of up to eight years. In contrast, private loans for the most part offer forbearance for only a year (sometimes longer if the borrower agrees to at least pay interest during that period).
In fact, the latest data shows that deferment is much more widespread with federal loans. Roughly 55 million, or 53% of outstanding federal student loans, were in deferment or forbearance in March 2012, according to TransUnion. In contrast, around 1.8 million or 19% of private loans were at that time.
Rather than delaying payments for a long period, borrowers with federal loans may want to consider some alternative repayment options that could lower their monthly bill. Most recently, the federal government launched a “Pay as You Earn” repayment plan that limits payments to 10% of a borrower’s discretionary income and forgives the remaining balance after 20 years of regular repayment, or after 10 years for those in public service.