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Years ago, I applied for the Borrower Defense to Repayment Program because I have student loans for a school that was punished for doing some shady things. Apparently the Department of Education is now being sued for never giving a response to those applications, and so they have put all of my student loans into forbearance for three years.

Now I doubt they will cancel any of my loans, and they certainly won't cancel all of them because some are for other schools that never had a problem, so I intend to keep paying them off. I was going to call and opt out of the forbearance, but then I wondered if I could use it to my advantage.

I have several different loans at different interest rates. My thought is since I currently have no minimum payment and the interest will not be capitalized until the end of the forbearance, I could take the payment I'm currently making that's spread across all loans and instead apply it solely to the loan with the highest rate. This seems like it should pay the loans off faster, even though interest will continue to accrue on the loans I'm not making payments towards.

Is this thought process correct? Are there any disadvantages I'm not considering? If I do this and end up with some interest capitalized on the lower rate loans as a result, will that make me worse off?

The balances range from $300 to $13,000 and the interest rates range from 3.4% to 6.8%. Here's the full breakdown in case it affects the answer:

Group A Balance: $1800 Rate: 4.5%

Group B Balance: $300 Rate: 5.6%

Group C Balance: $3400 Rate: 3.4%

Group D Balance: $900 Rate: 6.55%

Group E Balance: $1300 Rate: 6.55%

Group G Balance: $2700 Rate: 6.8%

Group H Balance: $2600 Rate: 3.86%

Group I Balance: $4800 Rate: 3.86%

Group J Balance: $5400 Rate: 4.66%

Group K Balance: $13,600 Rate: 4.66%

I'm paying $600 per month. (Group F is paid off, if you were wondering why it was skipped.)

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    Were you using an income-based repayment plan prior to the forbearance? – Hart CO Dec 28 '19 at 5:21
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    @HartCO no, I've been paying the regular payment. I'm not on any sort of special repayment plan. I actually forgot I even put in that application to cancel some of the loans until they sent me a letter about it. – Kat Dec 28 '19 at 18:48
  • That's the one thing I think forbearance throws off a bit is the timing for forgiveness on income-based plans, but a non-issue for you. If they've been applying your payments normally while in forbearance then you've definitely found a good approach and can save a bit by knocking out those higher rates first. – Hart CO Dec 28 '19 at 18:54
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My thought is since I currently have no minimum payment and the interest will not be capitalized until the end of the forbearance, I could take the payment I'm currently making that's spread across all loans and instead apply it solely to the loan with the highest rate. This seems like it should pay the loans off faster, even though interest will continue to accrue on the loans I'm not making payments towards.

Yes, this is the avalanche method. It is the fastest, and cheapest, way to pay down debts as long as you stick to it.

The biggest thing that forbearance changes in the analysis is the minimum payments. $0 minimum payment means you will pay off your loans faster using avalanche with forbearance than if you did not have forbearance.

Interest on the loans you are temporarily ignoring will accrue, but won't capitalize until forbearance ends. You don't need to do anything special because of this. When forbearance ends you will need to resume making minimum payments on all your loans and anything extra goes toward the highest interest rate (the normal avalanche method). The delayed capitalization of the interest might be another small benefit of using forbearance this way, depending on when interest compounds in your loans.

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    What about the interest that will build up and get capitalized at the end of the forbearance? Should I stop the "avalanche" payments towards the end of that and pay off the built up interest on the lower rate loans or let it get added to the principal? – Kat Dec 28 '19 at 18:51
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    @Kat No, just ignore those loans for now and let it capitalize when it does. When forbearance ends just resume making minimum payments on everything and putting as much extra into the highest rate loan that you have. – Matt Dec 28 '19 at 18:57

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