Income-Driven Payment vs Forbearance

Navient, the largest servicer of student loans, has been in the news this past week because it is being sued by the Consumer Financial Protection Bureau and several states’ attorneys general. One of the CFPB’s charges is that Navient steered borrowers into forbearance instead of income-driven repayment, which often results in borrowers owing considerably more. Why? There are some big differences between income-based programs and forbearance:

  • In an income-based plan, the borrower continues making payments on their loan, but at a lower rate. The borrower pays either 10% or 15% of discretionary income towards loans under an income-based plan.
  • In forbearance, the borrower makes no payments during the forbearance period. There is a qualification process– you can’t just decide to take time off from student loan payments– but if you qualify, you don’t pay.

Not paying sounds cheaper, but it’s not: When you’re in forbearance, interest continues to accrue on your loans, sending your balance (and future payments) up. Many of the income-based plans include subsidies for the interest that would otherwise accrue, leaving the borrower with a lower loan balance than what they’re likely to see coming out of forbearance.

Generally speaking, when your loan is in repayment, your best bet is to pay it. There are a variety of income-based plans available including REPAYE, PAYE, IBR, ICR, and more. Details are available on the Federal Student Aid website.

The CFPB’s website has details of the suit against Navient here.

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