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The Guarantor of Choice SM |
Creating Consistency in Educational Finance: A Training Curriculum
Module 1: Customer Service Representatives
Knowing the regulatory requirements for forbearances
Forbearance is the temporary revision of the terms of the repayment schedule by the cessation of payments, an extension of time for making payments, or a reduction in the payment amount. The lender may grant forbearance based on either a written or verbal agreement with the borrower. During forbearance, payments to both principal and/or interest can be postponed.
Forbearance should be considered carefully as a temporary means to assist the borrower with repayment. If the student's financial situation is not strong enough to support making payments and the student does not meet any of the specified criteria for a deferment, then a forbearance is the most appropriate option.
Forbearance should only be granted if the lender believes the borrower intends to repay the debt once he or she overcomes the financial hardship. Keep in mind that a forbearance should never be granted if the borrower demonstrates an unwillingness to repay the debt either now or in the future.
Also, requests for forbearance can be denied — especially if the borrower's request shows that he or she is trying to accommodate a higher standard of living rather than because of a circumstance that has caused a strain on finances. Forbearance is to be used to assist borrowers with temporary periods of inability to submit payments. It is not meant to be a solution to a borrower's chronic financial difficulty.
In assessing the borrower's financial situation, customer service representatives should be aware of the four types of forbearance options available to borrowers. These options include the following;
- Discretionary Forbearance,
- Mandatory Forbearance,
- Administrative Forbearance, and
- Mandatory Administrative Forbearance
Although there are four forbearance options, customer service representatives will most likely work on a regular basis with the two most common types of forbearance, which are the Discretionary Forbearance and the Mandatory Forbearance. Therefore, this section will cover these two options at length. For a complete and thorough review of all forbearances, review the Common Manual (Section 11.18), also available online at www.tgslc.org/resources/integrated_online_manual.cfm#icm.
Discretionary forbearance
Unlike deferments, borrowers are not entitled to a discretionary forbearance. However, lenders have the discretion and authority to offer forbearances to assist borrowers in the repayment of their debt when appropriate.
Discretionary forbearance is granted when the borrower is experiencing financial hardship that results in an inability to repay the debt. For example, financial hardship can occur when the borrower has experienced poor health, unemployment (beyond the deferment time), a reduction in work hours, or a life-changing circumstance. Also, a discretionary forbearance in the form of reduced-payments can be granted if the borrower is experiencing financial difficulty. This allows the borrower to continue the pattern of submitting payments on the account.
Federal regulations require that discretionary forbearance be granted in increments not to exceed 12 months per occurrence. The 12-month forbearance can include past months and future months of forbearance. For example, a forbearance that is granted six months retroactively (to cure a delinquency), can only be extended six months into the future. All forbearance requests need not be granted in 12-month increments. Each lender will have its own guidelines for granting forbearance.
Discretionary forbearance does not have a maximum time limit. Therefore, it is critical that each request be reviewed thoroughly in an effort to keep borrowers from entering default. As customer service representatives, some questions to consider when assessing the borrower's request for a forbearance are as follows:
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What is the present status of the account? How large is the balance? How long has the account been in repayment? Consider the time remaining in the repayment period. How much has the borrower paid? How much forbearance has been granted in the past? How much interest has accrued to the account? Does the borrower's request strongly suggest other debt takes priority? After granting the current forbearance request, will the borrower be able to adhere to a new repayment plan? |
Mandatory forbearance
Unlike discretionary forbearance, lenders must grant mandatory forbearance to the borrower. Therefore, when speaking to borrowers, customer service representatives should familiarize themselves with the situations under which a student can request a mandatory forbearance. A description of these situations follows. Note that the borrower must provide documentation supporting eligibility.
- Borrower's participation in an Internship/ Residency program (beyond the timeframe requirements for a deferment)
- Borrower's participation in a national service position where he/she will receive an award under the National and Community Service Trust Act of 1993 (Americorp)
- Borrower maintains eligibility for loan forgiveness under the Teacher Loan Forgiveness Program and lender believes that the cancellation amount will satisfy the anticipated loan balance at the time of the expected cancellation
- Borrower's service that will qualify the borrower under the Child Care Provider Loan Forgiveness Program
- Borrower's service that will qualify the borrower for partial loan repayment under the Student Loan Repayment Programs administered by the U.S. Department of Defense
- Mandatory forbearance can be granted in increments of 12 months, with no maximum time limit as long as the borrower maintains eligibility.
Interest accrual during forbearance
An effective default prevention method that customer service representatives can use when counseling borrowers is to provide them with a real example demonstrating the effects of a forbearance on their total loan balance. Borrowers should be alert to the fact that interest continues to accrue to the account during periods of forbearance. Although accrued interest is calculated on a simple daily basis, interest can accumulate over time and result in a much higher loan balance.
Additionally, borrowers should be cautioned that forbearances can result in a higher monthly payment once the forbearance period ends. This is one of the disadvantages of forbearance. Since additional interest accrues to the account during forbearance and the length of the repayment period remains the same, the amount of the monthly payment will most likely increase.
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The following formula demonstrates how simple interest is calculated: Interest Accrued = (Principal loan balance x Interest rate x Number of days in forbearance) / 365.25 Example: How much interest accrues on 6-month forbearance from April 1 to September 30? Average principal loan balance: $10,000 Interest rate: x .08 Days in forbearance: x 182 Divided by: 365.25 Total interest accrual: $398.63 |
For more information on the frequency of interest capitalization, review the Common Manual (Section 10.10.B)
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© 2008 Texas Guaranteed Student Loan Corporation |
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