Suspension of payments, known as tolerance, has meant much-needed relief for those who keep abreast of their student loans or pay other bills. But, for those who can afford it, it also offers the opportunity to eliminate savings or make student loan payments anyway, without adding interest.
This is because the tolerance automatically applies to anyone with federally owned student loans and will not increase your payments during the break period.
“The absence of student loans is an opportunity for people to move forward in these areas without derailing the rest of their budget,” said Bruce McClary, senior vice president of communications for the National Federation of Credit Counseling (NFCC). “It’s also a good time to apply extra money to paying high-interest credit cards or signed loans.”
Here’s how you can 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 a top priority. Credit cards typically have high interest rates and can prevent you from getting the most out of your money for things like setting up an emergency fund and saving for retirement.
The average interest rate on the credit card is 14.65%, according to data from the Federal Reserve.
Combine high interest rates with minimum payments, and you may be paying off your credit card for years.
Take this time to pay far more than the minimum of your card balances. Doing so will help you meet your debt faster and free up credit for other expenses you may need later.
Increase emergency savings
It is never a bad idea to start an emergency fund. Because? As we have all seen over the last year, life can be unpredictable. So it’s always good to be prepared.
Emergency savings can be useful in unexpected events, such as a car accident or job loss. It can also serve as a financial cushion when making a transition in uncertain times.
With paused monthly student loan payments, you can redirect the amount you would have paid toward your loans to a savings account to accumulate your emergency fund.
Mark Kantrowitz, an expert on student loans, recommends doing so first before deciding whether to continue paying off student loans during the tolerance period.
“Aside from covering unforeseen vehicle repair or home maintenance expenses, 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 on living expenses.
Save for retirement
Saving to retire while paying off debt can be a challenge. But with student loans on hold, you can take advantage of 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 matches contributions of up to 6% of your salary, you should contribute at least 6% to your 401 (k) to get the most out of it.
“It’s free money, hard to beat,” Kantrowitz said.
Consider making payments for your student loans anyway
Lost payments are not forgiven. Your loan total will remain the same, so keeping it in tolerance will extend the repayment period. If you can still pay the payment, your loan will be repaid sooner.
“If you’re in a good place with the rest of your financial goals and obligations, you can make a lot of progress toward paying off your student loans as long as no interest is generated,” McClary said.
But there are exceptions. For those enrolled in programs such as Public Service Loan Forgiveness (PSLF) or income-based repayment plans, you should refrain from making additional payments on your loans while they are in tolerance. This is because additional payments can reduce the amount of forgiveness you will eventually receive.
“It might make sense to focus on growing your retirement and investment accounts,” said Travis Hornsby, founder and CEO of Student Loan Planner.
But this is not all.
Robert Farrington, founder of The College Investor, an investment and personal finance website for Millennials, recommends that income-based return plan borrowers re-certify their income before September to ensure new payments reflect what they are currently doing.
“This is especially important for people who may have a significant reduction in income due to the pandemic. If you don’t re-certify based on your current income, you may have a much larger loan payment than you can afford. allow, ”he said.
On the other hand, program borrowers like the PSLF should make sure that they are certifying their employment to get credit for eligible jobs throughout the tolerance period.
Prepare for payments to be recovered
The absence of student loans will not last forever and when it is over, you should be prepared to resume payments.
“Don’t lose sight of the date you will have to pay,” McClary said. “Set reminders and make sure it’s always on your radar.”
As for borrowers who may not be in a position to start repaying their loans for reasons such as prolonged financial difficulties, they should explore affordable repayment options a few months before the tolerance ends.
McClary says organizations like the NFCC offer advice on student loan repayment to help borrowers understand which affordable repayment options are best suited to their circumstances and how to navigate the application process.
The conclusion
Whether you want to save for retirement, set aside money for financial emergencies, or simply eliminate high-interest debt, making the most of your student loan repayment break can help you achieve these financial goals.
“Use this period to increase emergency savings, pay off other debts, establish regular retirement contributions, and strengthen your overall finances,” Hornsby said. the next time there is a financial storm, you are well prepared to do so. “