Roughly 41 million borrowers will have a few more months to enjoy an interest accruing-free repayment pause on their student loans, even while U.S. inflation is at a 40-year high.
While federal student loan borrowers may be worried about what to do when repayment resumes, personal finance experts are concerned about what you do now with your money, until August 31 when the pandemic payment pause is set to end.
We talked to several money-minded thought leaders about student debt and how to finesse your finances during this sixth repayment freeze.
Nicole Brown-Griffin, Late Bloom Advising
If a student loan borrower has no other debt, a healthy emergency fund for their lifestyle/family structure, and is saving for retirement, they should definitely use this student loan payment pause to pay down their principal balance.
This would do wonders for attacking student loan debt, but only if they’re in the right financial position to do so. While debt repayment is important, having a strong financial safety net is key.
I would stress that the borrower has at least $500 to $1,000 saved in an emergency fund — but having three to six months’ worth of living expenses would be ideal.
Read more: Emergency funds: everything you need to know
Jason Anderson, Gradmetrics
If the borrower has federal student loans exclusively, they should use the Department of Education’s Loan Simulator to get a better understanding of the best path forward, both in terms of repayment plans and possible forgiveness. Note that the simulator only considers Public Service Loan Forgiveness (PSLF) — borrowers will have to research other opportunities that might exist. Other loan forgiveness programs are typically state- and profession-specific.
For borrowers considering loan forgiveness, the payments not made during this period still qualify for PSLF and long-term loan forgiveness. Not paying on loans maximizes forgiveness and frees up funds that can be diverted to other uses such as saving, retirement planning, etc.
For those wanting to pay down debt, use this time to pay down loans. You’ll minimize overall interest accrual (since interest is suspended) and shorten the repayment timeline. You can either pay down the lowest balance loans first to build momentum (the “snowball” method) or increase efficiency by first paying off the student loans with the highest interest rates (the “avalanche” method).
Read more: Snowball vs. avalanche: which debt payoff method is best?
Patti Hughes, Lake Life Wealth Advisory Group
It all depends on your circumstances. In some cases, it makes sense to keep paying on the loan, and in others, it makes sense to redirect the money.
If you’re not trying to achieve student loan forgiveness under an income-driven repayment plan, it usually makes sense to keep paying on the loan — since not paying on it just extends the repayment period.
If you have a high income and don’t benefit from income-driven repayment plans, you should continue making payments on the loans. Interest rates are frequently in the 6% range, so it makes sense to try to apply these payments to the principal of the loan.
It’s different if you’re trying to achieve loan forgiveness either through a regular income-driven repayment plan or Public Service Loan Forgiveness. In that case, you should not repay the loans since the months the payments were paused count towards loan forgiveness.
The amount that could have gone towards student loan payments can be used to establish or replenish an emergency fund, repay other high-interest debt, save for a down payment on a home, or invest in retirement accounts.
Stephen E. Fletcher, EVOadvisers.com
There is no other time where you can avoid paying interest on a debt like this. For some students, the interest rate is well over 5%. This is an excellent opportunity to make your money work for you by getting the loan paid off entirely. It will also free up cash flow for saving after the pause is lifted since there will no longer be a required monthly payment.
If you are saving and investing the funds that would normally be going towards the repayment, it is OK to wait on getting the loan paid off. Your future self will enjoy the benefit of the growth in those investments.
What you cannot do is take the monthly amount that should have gone towards student loan payments and just spend it. Your monthly budget will become increasingly more dependent on that spending amount, and when the pause is lifted, those first months are going to be very difficult and stressful. Save or pay down, but please don’t spend!
Jason Dall’Acqua, Crest Wealth Advisors
If you are on the PSLF plan then there is no need to make payments on your loans, as the forbearance period continues to count toward your 120 months of required payments.
If you are not on the PSLF then the decision becomes slightly more difficult. However, it is likely more beneficial to use that money toward other goals since it remains to be seen what will happen — there could be a continued pause in payments or the potential for partial debt forgiveness. The majority of student loan borrowers have chosen to use the pause.
The student loan payment pause provides a great opportunity to work toward other financial goals such as paying down high-interest debt, saving for a house, or boosting retirement savings.
Take the amount that would be going toward your student loans and use it to improve an area of your financial situation. This way when payments do resume, your cash flow will not be negatively impacted since the money has not been absorbed into your daily expenses.
I have clients who are taking advantage of this period by increasing their 401(k) contributions and adding to their liquid investments, giving them an additional boost toward their retirement goals.
Do not pause payments and have that excess cash flow be lost to miscellaneous day-to-day expenses. It will be difficult to adjust your cash flow back if/when student loan payments resume.
Stanley Himeno-Okamoto, DRS Financial Partners LLC
I usually recommend redirecting the paused monthly payment amount to a designated savings account — a high-yield savings account if possible — separate from your other accounts.
Once repayments restart, you can decide whether to use the accumulated money to make a lump-sum payment or direct it to other areas like longer-term investments.
In the meantime, having the extra cash gives you more flexibility in case an emergency comes up. I’ve already had several clients who were thankful they saved their monthly payments on the side because of unexpected expenses, job losses, or medical bills.
Read more: Best high-yield savings accounts compared
Jordan Nietzel, Trek Wealth Planning
I am advising my clients not to pay on their student loans during the pause. Because payments aren’t required and no interest is accruing, there is no downside to not making the payments.
They could be saving the payments they would otherwise be making in a high-interest savings account and earn some interest. Then, before the payments start up again, they could apply that savings balance to their student loans and end up in a better position than if they had continued making payments during the pause.
That is just one example, but clients could also be paying extra on other debt, like credit cards or private student loans, and eliminate those faster.
The key is you want to avoid increasing your lifestyle spending while you’re not making payments, because eventually, those payments are going to start again. It’s really hard to adjust lifestyle spending downward. Instead of increasing spending, save those dollars in a high-interest savings account until payments start again, or pay down other debt.
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