Student loan borrowers got a welcome gift in March 2020 from the U.S. Department of Education—a temporary suspension of loan payments and a 0% interest rate amid the uncertain long-term effects of the pandemic. The freeze has since been extended four times (now lasting through Sept. 30, 2021) and presents a big question for borrowers: to pay or not to pay?
Should you keep paying off student loans during the pandemic?BY Sydney LakeApril 27, 2021, 3:00 AM
The freeze provisions to defer student loan payments under the CARES Act don’t apply to everyone with student loan debt. Of the 44.7 million borrowers in the U.S., only those who hold Department of Education–owned loans are eligible for payment suspensions. And most borrowers have a mix of federal and private loans, according to student loan experts.
“Now that they’ve extended it, it really presents some opportunities for people to think about their finances and how they’re directing their income to be in a much better place when this forbearance expires,” says Kristen Holt, president and CEO of GreenPath Financial Wellness.
You spent time pursuing a degree to further your career, but you don’t want the debt that comes with it to limit your opportunities. Here’s how to think through that “should I or shouldn’t I” pay off debt dilemma, as well as a few options for handling the payment freeze including continuing to make payments, redirecting funds to savings, and changing your payment plan itself.
Save the money for an even rainier day
If you choose to take advantage of the repayment reprieve and have extra cash on hand, now may be the perfect time to establish an emergency fund.
“Put your money into a higher-yielding savings account for the time being,” suggests Patti Hughes, principal of Lake Life Wealth Advisory Group. “If you make the payments on the loan when you’re not required to, then you can never get that money back.”
Building up a nest egg with three to six months’ worth of student loan payments could help prevent tapping into your 401(k) or other savings accounts during uncertain financial times, says Hughes, a certified ACP adviser who specializes in student loan repayment. The freeze can also be a good time to pay down higher-interest debt such as credit card bills, she adds.
“Still, practice making that payment so that it’s going toward some other debt or toward savings,” Holt agrees. “That’ll make the reentry into having to make the payments easier.”
It pays to pay off debt
Meanwhile, for those who can afford to do so, experts encourage borrowers to take advantage of paying off the principal amount of their loans without the burden of high interest rates.
“Some borrowers are going to be able to pay back their loans quicker during this pandemic because interest is paused, but they’re paying back the principal. If you can do that, that’s great,” says Cody Hounanian, director of programs at Student Debt Crisis, a nonprofit organization focused on ending student debt. However, “most student loan borrowers don’t find themselves in that scenario,” he adds.
While some borrowers may choose to instead pay off credit card bills and higher-interest loans, Leslie Tayne, the founder and managing director of Tayne Law Group, says it makes more sense to pay off student loans during a period with 0% interest.
“My advice is to continue to pay if you could fit it in your budget, because now you’re paying toward principal,” says Tayne, who has been counseling people on private and federal loans for 20 years. “And at the point in time when interest kicks back in, the interest will be based on a lower principal balance, and therefore you’ll pay less over time.”
Plus, stimulus checks can serve as an income boost that can help some people make voluntary student loan payments, she adds.
Take payments at your pace
Even if you can’t afford your typical monthly payment, you can still pay down your principal balance through smaller, manual payments, Tayne says.
Switching to an income-driven repayment plan could help. This alternative to a standard plan calculates monthly payments based on your most recent tax filings, which could be especially beneficial to borrowers who saw a drop in income in 2020 during the pandemic. But be aware: Income-driven plans aren’t friendly to higher-income earners, so private refinancing could be a better option.
Just like paying off any other debt, it’s important to find a pace that makes sense for your situation. If you’re driven to pay off your student loans quickly, it’s not a bad idea to chip away at that debt during the pandemic, Hughes says.
What are the odds of student loan forgiveness?
In March 2021, the Department of Education announced it had forgiven the debt of 72,000 borrowers who attended a school that closed suddenly or was proven to have taken part in illegal or deceptive practices. Measures such as this, and backing from some of Washington’s top leadership (like Majority Leader Chuck Schumer, a Democrat from New York), could be a sign in favor of student loan forgiveness or freeze extensions as a result of the pandemic, says Hounanian.
Other financial advisers, however, don’t see student loan forgiveness as an eventual reality.
“I wouldn’t count on it,” Tayne says. “The realities of the situation are that you have student loans, you borrowed money, and you have an obligation to pay it back.”