Should you pay down student loan debt during moratorium?
This 1% club has nothing to do with millionaires and billionaires.
This one represents the number of borrowers who have continued to make monthly payments on their federal student loans despite a payment pause that’s been in place for nearly two years.
While the vast majority of federal student loan borrowers are taking advantage of the payment moratorium and interest-rate waiver that now extends until May 1, what if you’re considering resuming payments now to chip away at the debt? Does it make financial sense to restart with only three months before the pause is scheduled to be lifted?
Writing those monthly student loan checks is a sound strategy for borrowers who want to pay down their federal loans faster, though at this stage of the payment pause, there might not be much benefit. Before pulling the trigger, borrowers should consider their longer-term goals and overall financial circumstances.
About 500,000 borrowers, or about 1.2% of the total eligible federal loan borrowers, have made monthly loan payments since the first pause and interest waiver hit in early 2020 because of the pandemic, according to the U.S. Department of Education. There is no moratorium on private loans.
Now in the fifth payment pause, it’s anyone’s guess how much longer the freeze will last. Which is one reason why borrowers might want to start repayment and get on with their lives.
Whether or not you’re considering resuming your federal loan payments before May, here’s some advice.
Start by running the numbers. If you’re planning on resuming payments over the next three months, review your budget, your spending habits, the amount of income — if any — you have coming in, and any other debt you’re on the hook for, such as credit cards and auto loans.
Are there discretionary expenses that need to be cut to make room for student loan payments again? Do you have higher interest rate debt that isn’t paused?
Since there’s currently zero interest being charged on the balance for federal student loans, it makes sense for many borrowers to continue to divert money once earmarked for student loans to paying down the more expensive debt, said Mark Kantrowitz, a student loan expert and author of “How to Appeal for More Financial Aid.”
Building or bulking up an emergency fund with at least six month’s salary should also be a priority during the moratorium. Ideally, you’ve been doing this all along, though it’s hard to save much when prices for everything seem to have gone up.
You may have a job, but you never know what might happen in a month or two. An emergency fund could at least help tide you over until you land on your feet again.
Anna Helhoski, a student loan expert at NerdWallet, suggests saving the money that had been used on student loans, then making a lump-sum payment against your highest-interest rate federal loan when repayment programs resume.
If you decide to start making payments, you won’t pay any new interest on your loans during the pause, Helhoski said. In addition, update your contact information with your loan servicer so you don’t miss important information about new payment due dates, the loan balance and payment amounts.
Likewise, if you aren’t using the AutoPay system to automatically transfer loan payments from your bank account to your service, consider doing it.
Federal loan servicers offer a 0.25% reduction on your loan rate by using this convenient option.
Finally, check out the Education Department’s online resources for more details on preparing to restart payments at https:// studentaid.gov/announcements-events/ covid-19#repayment-prep.