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The suspension of payments, known as forbearance, has provided 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 put away their savings or pay off a student loan anyway – without the interest accruing.
This is because forbearance automatically applies to anyone with federal student loans and will not increase your payments during the break period.
“Withholding student loans is an opportunity for people to move forward in these areas without derailing the rest of their budgets,” said Bruce McClary, senior vice president of communications for the National Federation for Credit Counseling (NFCC) . “Now is also a good time to allocate extra money to pay off high interest credit cards or signed 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 usually have 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 data from the Federal Reserve.
Pair high interest rates with minimal payments and you could pay off your credit card for years.
Take this time to pay far more than the minimum on your card balance. This will help you pay off your debts faster and free up credit for other expenses you may need later.
Build your emergency savings
It is never a bad idea to create an emergency fund. Why? As we’ve 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 up your emergency fund.
Mark Kantrowitz, a student loan expert, recommends doing this before deciding to continue paying off student loans during the forbearance period.
“In addition to covering unforeseen expenses for auto repair or home maintenance, 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.
Save for retirement
Saving for retirement while paying off debt can be difficult. But with student loans on hold, you can use this time to increase 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 company matches contributions up to 6% of your salary, you must contribute at least 6% to your 401 (k) to fully benefit from it.
“It’s free money, which is hard to beat,” Kantrowitz said.
Still consider making payments on your student loans
Missed payments are not forgiven. The total amount of your loan will remain the same, so keeping them in forbearance will extend the repayment period. If you can still afford to make payments now, your loan will be paid off sooner.
“If you’re on a good footing with the rest of your financial goals and obligations, you can make quite a bit of progress on paying off your student loans without the interest accruing,” McClary said.
However, there are exceptions. For those who are enrolled in programs such as Public Service Loan Forgiveness (PSLF) or income-oriented repayment plans, you should refrain from making additional payments on your loans while they are in. abstention. This is because additional payments may reduce the amount of forgiveness you will eventually receive.
“It might make sense 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 they re-certify their income by September to ensure that new payouts 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 for resumption of payments
Student loan forbearance won’t last forever, and when it ends, you should be ready to resume payments.
“Don’t lose sight of when your payment will be due,” McClary said. “Set reminders and make sure they’re always on your radar.”
As for borrowers who may not be able to start repaying their loans due to reasons like 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 repayments 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 achieve these goals. financial.
“Take advantage of this time to increase your emergency savings, pay off other debts, establish regular retirement contributions and strengthen your overall finances,” Hornsby said. Think of student loan forbearance as an opportunity to fill the holes in your roof financially so that the next time there is a financial storm, you are well prepared. “
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