SVC-03 · Servicing guide

Hardship and forbearance programs explained

Every hardship option moves an obligation through time. None of them reduces what you owe, and most of them increase it. That is not an argument against using one — it is the thing you have to know before you choose which.

Section 01What “pausing payments” actually is

Hardship relief is not forgiveness. The loan continues to exist, interest normally continues to accrue, and the paused instalments have to be dealt with at the end. What the programs differ in is how the paused amount comes back: as a lump sum, spread over later payments, added to the end of the loan, or folded into a new payment schedule.

That is the question to ask on the call, and it is more important than the length of the pause: “At the end of this, what exactly do I owe and when?” A three-month forbearance that ends in a lump-sum demand you cannot meet has not helped you.

Section 02The four options compared

Availability depends entirely on the loan type, the investor or guarantor behind it, and the servicer's own policy. Federal student loans have statutory programs with defined rules; a private instalment loan may have nothing at all beyond what the servicer chooses to offer.

Section 03Accrual and capitalisation

Two mechanics decide the true cost of a pause.

Accrual. On most loans, interest keeps being charged on the outstanding balance whether or not you are paying. Six months of paused payments is six months of interest added to what you owe.

Capitalisation. At the end of the period, that accrued interest is often added to the principal balance. From then on you pay interest on the larger figure — interest on interest. Capitalisation is the single most expensive detail in hardship relief and it is the one least often explained on the call.

Section 04What it does to your credit file

Broadly: a properly agreed and correctly reported hardship arrangement is much better for your credit file than simply not paying. An account in an approved program is generally not reported as delinquent for the paused payments, though it may carry a notation indicating the arrangement.

Three caveats worth stating.

• Approval matters, not intention. Stopping payments while an application is pending is not the same as being in a program. Do not stop paying until the arrangement is confirmed.
• Reporting errors happen. Pull your credit reports a month or two into the program and check that the account is reported as agreed. Errors are fixable, and easier to fix early.
• Some lenders read notations. A hardship notation is visible, and a future underwriter may take it into account even though it is not a delinquency.

Section 05How it ends

The exit is where hardship programs go wrong. Before you agree to anything, get the exit terms in writing:

1. The exact date the program ends.
2. The first payment amount after it ends, and the date it is due.
3. What happens to the paused instalments — lump sum, spread, or deferred to maturity.
4. The balance you will owe on the day it ends.
5. Whether accrued interest will be capitalised.
6. How the account will be reported to credit bureaus during and after.

If the servicer will not put those six in writing, that is information. Ask again, in a written request, and keep the response.

Section 06Making the call

Call early. Options are widest while the account is current and narrow sharply as delinquency deepens. Before you dial, have your account number, a short factual description of the hardship (job loss, medical event, reduced hours, disaster), the date it started, and a realistic estimate of when it resolves. Be specific about what you can pay, if anything.

Then log the call — date, time, name, reference number, what was offered, what was agreed and when the paperwork will arrive. If the paperwork does not arrive when promised, call back and quote the reference.

Section 07Avoiding relief scams

Financial distress attracts predators, and their pitch is designed to sound like the help you were looking for. Treat all of these as disqualifying:

• An advance fee to obtain a modification or forbearance. Charging up front for mortgage relief services is prohibited under federal rules in most circumstances.
• An instruction to stop paying your servicer or to send payments to a third party instead.
• A guarantee of approval. Nobody outside your servicer and its investor can guarantee an outcome.
• Pressure to sign quickly, or to sign anything transferring title to your property.
• A request to communicate only through them and not with your servicer.

Section 08Free help that is genuinely free

Your servicer's loss-mitigation department is free and is the only party that can actually approve anything. Non-profit credit counselling agencies provide free or low-cost budget and debt counselling. For mortgages, housing counselling agencies approved by the federal housing department provide free advice, and the Consumer Financial Protection Bureau maintains a public complaint process at no cost. None of these charges an advance fee, because none of them needs to.

Related: payment options and avoiding late fees and understanding your monthly statement.