The suspension of payments, known as forbearance, has brought much-needed relief to those torn between staying on top of their student loan or paying other bills. But for those who can afford it, it also offers the option to store savings or pay for student loans – without increasing interest.
That’s because the tolerance automatically applies to anyone with federally held student loans and will not increase your payments during the break period.
“Student loan tolerance is an opportunity for people to make progress in those areas without derailing the rest of their budgets,” said Bruce McClary, senior vice president of communications for the National Federation for Credit Counseling (NFCC). “It is also a good time to use extra money to pay off high-yield credit cards or signature loans.”
Here’s how to get the most of your finances while pausing student loan payments.
Pay off your credit card debt
Tackling credit card debt should be the top priority. Credit cards typically have high interest rates and can keep you from making the most of your money for things like building an emergency fund and saving for retirement.
According to data from the Federal Reserve, the average interest on a credit card is 14.65%.
Couple high interest rates with minimal payments and you could pay off your credit card for years to come.
Take this time to pay much more than the minimum on your card balance. Doing this will help you settle your debt faster and free up credit for other expenses you may need later.
Build your emergency savings
It’s never a bad idea to start an emergency fund. Why? As we’ve all seen over the past year, life can be unpredictable. So it is always good to be prepared.
Emergency savings can come in handy during unexpected events, such as a car wreck or job loss. It can also serve as a financial buffer when making a transition in uncertain times.
With monthly student loan payments on break, you can divert 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 to repay student loans during the grace period.
“Aside from covering unexpected car repair or home maintenance costs, it will earn you money to cover living expenses during a period of unemployment,” he said.
Try to save at least three to six months in living expenses.
Saving for retirement
Saving for retirement while paying off debt at the same time can be a challenge. But with student loans on break, 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 full match. For example, if your business equals contributions up to 6% of your salary, you must contribute at least 6% to your 401 (k) to take full advantage.
“That’s free money, that’s hard to beat,” Kantrowitz said.
Either way, consider paying for your student loans
Missed payments will not be forgiven. The total of your loan will remain the same, so holding them in check will extend the repayment period. If you can still afford it now, your loan will be paid off sooner.
“If you’re in the right place with the rest of your financial goals and commitments, you can make quite a bit of progress in paying off your student loans while keeping interest rates on the rise,” McClary said.
There are exceptions, however. For those enrolled in programs such as Public Service Loan Forgiveness (PSLF) or income-driven repayment plans, you should refrain from making additional payments on your loans while they are tolerant. That’s because extra payments can reduce the amount of forgiveness you will eventually receive.
“It might make sense to focus on increasing your retirement and investment accounts,” said Travis Hornsby, founder and CEO of Student Loan Planner.
But that is not everything.
Robert Farrington, founder of The College Investor, a personal finance and investment website for millennials, recommends borrowers with income-driven repayment plans recertify their income by September to ensure new payments reflect how much they are currently earning.
“This is especially important for individuals who may have significantly lower incomes as a result of the pandemic. If you don’t re-certify based on your current income, you may be getting a much larger loan than you can afford,” he said.
On the other hand, borrowers in programs such as PSLF must ensure that they certify their employment in order to receive credit for eligible work during the entire waiting period.
Prepare to resume payments
Student loan tolerance won’t last forever, and when it ends, you should be willing to resume payments.
“Don’t lose sight of the date your payment is due,” said McClary. “Set reminders and make sure it’s always on your radar.”
As for borrowers who may not be able to repay their loans for reasons such as long-term financial hardship, look into affordable repayment options several months before tolerance expires.
McClary says organizations like the NFCC provide student loan repayment guidance to help borrowers understand which affordable repayment options are best for their circumstances and how to navigate the application process.
it comes down to
Whether you want to save for retirement, set aside money for financial emergencies, or just deal with high interest debt, making the most of the student loan break can help you achieve those financial goals.
“Use this period to save for emergencies, pay off other debts, make regular contributions to your retirement, and support your overall finances,” Hornsby said. “Think of student loan tolerance as an opportunity to fill the holes in your roof financially so that the next time there’s a financial storm, you’ll be well prepared.”