Federal student loan borrowers were big winners in the $2 trillion COVID stimulus bill: all federal student loan payments were paused until the end of September 2020. That executive order was extended and recently as part of his first duties as President, Joe Biden has extended the pause of federal student loan payments all the way until September 30th 2021.
So, what should you do while your student loans are paused during COVID?
I have seen many different people giving advice on this topic. Some of the advice is from borrowers who do not understand all the complexities of student loans and are not deep into personal finance. Others have come from people in personal finance with huge followings but have missed the mark with their comments.
First, let us recap what the CARES Act actually said.
Student Loan Relief the COVID Stimulus Bill (CARES Act) Highlights:
- All federal student loans will suspend payments for six months, ending September 30th, 2020.
- The suspended payments will count towards Public Service Loan Forgiveness (PSLF) and Income Driven Loan Forgiveness.
- This will happen automatically – borrowers do not have to do anything for payments to be suspended.
- Interest will not accrue during the six-month period that payments are suspended
The unfortunate news here is that all of this is only relevant to federal student loans. Any private student loans and FFEL loans not owned by the federal government received no relief in the stimulus bill.
If you have these student loans you should keep making payments if you are able to do so. If you are unable to due to loss of income (or any other reason), there are many loan servicers that are offering temporary forbearance (But you need to contact them before stopping payment). Commonly, in these situations, there will be a forbearance of up to 3 months and interest will build on your loans.
Let us get back to the original topic now that we have identified exactly what we are talking about. The most often asked question throughout this period is “Should I continue to make my federal loan payments if I can afford to do so?”.
Most often that answer is no and let me explain why. We are living in unprecedented times, things are changing constantly and you as a borrower currently have a Zero percent loan and are getting credit for your forgiveness, if that applies to you.
3 things that you can do with the money you were paying on your federal student loans that will get you ahead financially:
- Payoff/Increase payments:Take a look at any other debt(s) that you currently have and prioritize them.Put the money that you would have otherwise paid on your student loans to pay down those other debts.
- Build-up an emergency fund: Open a high-yield savings account and automatically deposit the money there.You will be earning interest and able to use the funds for any of life’s twists or turns.
- Increase your contribution to your retirement plan: If you haven’t taken advantage of your full employer retirement match this is a great way to boost your numbers.You could also have some sizeable tax advantages depending on your eligibility.
There are only two reasons that I have heard for viable reasons to continue making payments on these deferred federal student loans and those are: you have no other debt, or you have a lack of discipline and you will just spend the money if it doesn’t go to the federal student loans. The first reason I can understand but I have not met very many people that fall into that category. If you have a lack of financial discipline all 3 of the ideas above can be setup to maintain a systematic contribution and help build discipline.
Whichever route you choose, be sure to be ready for the day when these loans are no longer deferred, and the reality of these payments are at the forefront of your attention. Preparing and setting yourself up for financial success while you have a break can make a tremendous difference in your life.