Student loan repayments are suspended. Here’s how to get the most out of it
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The break on payments, which has been in effect since March, was due to expire on January 31. This allowed more than 20 million borrowers to stop paying off their student loans, while interest remained at 0%.
The suspension of payments, known as forbearance, has brought much-needed relief to those torn between staying up to date on their student loans or paying other bills. But for those who can afford it, it’s also an opportunity to set aside savings or pay off a student loan anyway – without the interest adding up.
Tips for paying off credit cards and other debt during the COVID-19 pandemic
This is because forbearance automatically applies to anyone with student loans held by the federal government and will not increase your payments during the break period.
“Student loan forbearance is an opportunity for people to make progress in these areas without derailing the rest of their budgets,” said Bruce McClary, senior vice president of communications for the National Credit Counseling Federation ( NFCC). “It’s also a good time to allocate some extra money to pay off high interest credit cards or signature loans.”
Here’s how to get the most out of your finances while student loan payments are on hold.
Pay off your credit card debt
Tackling credit card debt should be the top priority. Credit cards generally carry high interest rates and can prevent you from getting the most out of your money for things like building an emergency fund and saving for retirement.
The average credit card interest rate is 14.65%, according to Federal Reserve data.
Pair high interest rates with low payments and you could be paying off your credit card for years.
Take advantage of this time to pay far more than the minimum on your card balances. This will help you pay off your debt faster and free up credit for other expenses you may need later.
It can also help increase your credit score.
Build up your emergency savings
Creating an emergency fund is never a bad idea. Why? As we have all seen over the past year, life can be unpredictable. So it’s always good to be prepared.
Emergency savings can be useful during unforeseen events, such as a car accident or the loss of a job. It can also serve as a financial cushion during a transition in uncertain times.
With monthly student loan payments paused, you can redirect the amount you would have paid for your loans to a savings account to build your emergency fund.
Mark Kantrowitz, a student loan expert, recommends doing this before deciding whether to continue paying off student loans during the forbearance period.
“In addition to covering unforeseen auto repair or home maintenance expenses, it provides you with money to cover living expenses during a period of unemployment,” he said.
Try to save at least three to six months of living expenses.
Saving for retirement
Saving for retirement while paying off debt can be difficult. But with student loans on hold, you can use that time to boost your retirement savings.
If your employer offers a 401 (k) match, start by maximizing your contributions to get the complete match. For example, if your business matches contributions up to 6% of your salary, you must contribute at least 6% to your 401 (k) to take full advantage.
“It’s free money, which is hard to beat,” Kantrowitz said.
You can also automate your savings to make regular contributions to your retirement account and set aside extra money you might have after paying other bills.
Consider paying off your student loans anyway
Missed payments are not forgiven. Your loan total will stay the same, so keeping them forborne will extend the repayment period. If you can still afford to make payments now, your loan will be paid off sooner.
“If you’re well positioned with the rest of your financial goals and obligations, you can make quite a bit of progress toward paying off your student loans without accruing interest,” McClary said.
There are exceptions however. For people enrolled in programs such as Public Service Loan Forgiveness (PSLF) or Income-Based Repayment Plans, you should refrain from making additional payments on your loans while they are in forborne. . This is because additional payments may reduce the amount of discount you will eventually receive.
“It might be a good idea to focus on growing your retirement and investment accounts instead,” said Travis Hornsby, Founder and CEO of Student Loan Planner.
But that’s not all.
Robert Farrington, founder of The College Investor, a personal finance and investing website for millennials, recommends borrowers with income-focused repayment plans make sure to recertify their income by September for s ‘ensure that new payments reflect the amount they are currently earning.
“This is especially important for people who may have drastically reduced incomes due to the pandemic. If you don’t recertify based on your current income, you could have a much larger loan repayment than you can afford. “, did he declare.
On the other hand, borrowers participating in programs such as the PSLF must ensure that they certify their employment to obtain credit for qualifying work during the entire forbearance period.
Prepare to resume payments
Student loan forgiveness won’t last forever, and when it ends, you should be ready to resume payments.
“Don’t lose sight of when your payment is due,” McClary said. “Set reminders and make sure it’s always on your radar.”
As for borrowers who may not be able to start repaying their loans due to reasons such as prolonged financial hardship, they should explore affordable repayment options a few months before the forbearance ends.
McClary says organizations like the NFCC provide advice on student loan repayment to help borrowers understand which affordable repayment options best suit their situation and how to navigate the application process.
The bottom line
Whether you’re looking to save for retirement, put money aside for financial emergencies, or just cut down on high-interest debt, making the most of the student loan payment break can help you. help achieve those financial goals.
“Use this time to grow your emergency savings, pay off other debt, establish regular retirement contributions, and strengthen your overall finances,” Hornsby said. View forgoing student loans as an opportunity to fill the holes in your roof financially so the next time there is a financial storm, you are well prepared for it. ”