The suspension of payments, known as indulgence, provided much-needed relief for those divided between being aware of their student loans or paying other bills. But for those who can afford it, it’s also an opportunity to hide their savings or make student loan payments anyway – without adding interest.
This is because the tolerance automatically applies to anyone with federally held student loans and will not increase your payments during the break.
“The absence of student loans is an opportunity for people to make progress in these areas without disturbing 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 pay off high-interest credit cards or signed loans.”
Here’s how to get the most out of your finances while your student loan payments are cut off.
Pay off your credit card debt
Addressing credit card debt should be a top priority. Credit cards usually have high interest rates and can prevent you from making the most of money for things like building an emergency fund and saving for retirement.
The average interest rate for the credit card is 14.65%, according to Federal Reserve data.
Combine high interest rates with making minimum payments and you could pay off your credit card in years.
Take this time to pay much more than the minimum card balances. This will help you pay off your debt faster and release the credit for other expenses that you need later.
Increase emergency savings
It is never a bad idea to create an emergency fund. Why? As we have all seen in 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 wreck or job loss. It can also serve as a financial pillow when making a transition in uncertain times.
With monthly student loan payments on hiatus, you can redirect the amount you would have paid to your loans into a savings account to set up your emergency fund.
Mark Kantrowitz, an expert in student loans, first recommends this before deciding whether to continue repaying student loans during the tolerance period.
“Apart from covering unforeseen expenses for car repairs or home maintenance, it gives you money to cover maintenance expenses during the unemployment period,” he said.
Try to save on living expenses for at least three to six months.
Save for retirement
Saving for retirement while paying off debt can be a challenge. 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 full match. For example, if your company matches contributions of up to 6% of your salary, you should contribute at least 6% to 401 (k) to make the most of it.
“It’s free money, hard to beat,” Kantrowitz said.
We recommend that you make payments for your student loans anyway
Missed payments are not forgiven. The total of your loan will remain the same, so keeping them in tolerance will extend the repayment period. If you can still afford to make payments now, your loan will be paid sooner.
“If you’re in a good place with the rest of your financial goals and obligations, you can make quite a bit of progress toward paying off student loans while interest doesn’t accrue,” McClary said.
There are exceptions, however. For those enrolled in programs such as Public Service Loan Forgiveness (PSLF) or income-based repayment plans, you should refrain from making additional payments for your loans while they are in tolerance. This is because extra payments can reduce the amount of forgiveness you will eventually receive.
“It might make sense to focus on raising 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 investment website for Millennials, recommends lenders with income-based repayment plans re-certify their income by September to ensure that new payments reflect how much I do at present.
“This is especially important for people who may have significantly reduced incomes due to the pandemic. If you don’t re-certify based on your current income, you may have a much higher loan payment than you can afford,” he said. he.
On the other hand, borrowers from programs such as the PSLF should ensure that they certify their commitment to obtain credit for eligible work for the entire period of tolerance.
Prepare to resume payments
The absence of the student loan will not last forever, and when it is over, you should be prepared to resume payments.
“Don’t lose sight of the date the payment will be due,” McClary said. “Set reminders and make sure it’s always on the radar.”
For borrowers who are unable to start repaying their loans for reasons such as prolonged financial difficulties, they should explore affordable repayment options a few months before the end of the tolerance.
McClary says organizations like the NFCC offer student loan repayment counseling to help lenders understand which affordable repayment options best suit their circumstances and how to go through the application process.
Bottom line
Whether you want to save for retirement, set aside money for financial emergencies, or simply eliminate high-interest debt, make the most of your student loan payment break can help you achieve these financial goals.
“Use this period to increase emergency savings, pay off other debts, set regular pension contributions and secure your general finances,” Hornsby said. Think of indulgence for student loans as an opportunity to financially fix your roof holes, so the next time there is a financial storm, you’re well prepared for it. “