Suspension of payments, known as tolerance, has provided much-needed relief for those torn between staying on top of their student loans or paying other bills. But for those who can afford it, it is also an opportunity to save savings or make student loan payments anyway – without interest accruing.
This is because the tolerance automatically applies to anyone with student loans maintained by the federal government and will not increase their payments during the break period.
“Student loan tolerance is an opportunity for people to progress in these areas without hurting the rest of their budget,” said Bruce McClary, senior vice president of communications for the National Federation of Credit Counseling (NFCC). “It is also a good time to apply additional money to pay high-interest credit cards or loans with a subscription.”
See how you can get the most out of your finances while student loan payments are paused.
Pay off your credit card debt
Combating credit card debt should be a priority. Credit cards often carry high interest rates and can prevent you from making the most of your money for things like creating 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 can pay your credit card for years.
Take advantage of this time to pay much more than the minimum on card balances. This will help you resolve your debt more quickly and free up credit for other expenses you may need later.
Increase your emergency savings
It is never a bad idea to start an emergency fund. Why? As we all saw last year, life can be unpredictable. Therefore, it is always good to be prepared.
Emergency savings can be useful during unexpected events, such as a car accident or job loss. It can also serve as a financial mattress when making a transition during uncertain times.
With monthly student loan payments on hold, you can redirect the amount you would pay for loans to a savings account to form your emergency fund.
Mark Kantrowitz, a student loan specialist, recommends doing this before deciding whether to continue making student loan repayments during the grace period.
“In addition to covering unforeseen expenses with car repairs or home maintenance, it provides money to cover living expenses during a period of unemployment,” he said.
Try to save at least three to six months in living expenses.
Save for retirement
Saving for retirement and paying off debt can be a challenge. But with student loans paused, you can use that time to increase your savings for retirement.
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 must contribute at least 6% to your 401 (k) to get the most out of it.
“This is free money, which is difficult to win,” said Kantrowitz.
Consider making payments on your student loans anyway
Missed payments are not being forgiven. The loan total will remain the same, so keeping them in tolerance will extend the repayment period. If you can still pay now, your loan will be paid off earlier.
“If you are in a good place with the rest of your goals and financial obligations, you can make a lot of progress towards paying off your student loans while interest is not accruing,” said McClary.
However, there are exceptions. For those enrolled in programs like public service loan forgiveness (PSLF) or income-based repayment plans, you should avoid making extra payments on your loans while they are in tolerance. This is because additional payments can reduce the amount of forgiveness you will receive.
“It may make sense to focus on increasing your retirement and investing in accounts,” said Travis Hornsby, founder and CEO of Student Loan Planner.
But that is not all.
Robert Farrington, founder of The College Investor, a personal finance and investment site for the millennium generation, recommends that borrowers with income-based repayment plans recertify their income by September to ensure that new payments reflect how much they make at the moment.
“This is especially important for individuals who may have a significantly reduced income due to the pandemic. If you do not recertify based on your current income, you may have a much higher loan payment than you can afford, ”he said.
On the other hand, borrowers in programs like the PSLF must make sure that they are certifying their employment to obtain credit for eligible work throughout the grace period.
Get ready to resume payments
The tolerance of the student loan will not last forever, and when you are finished, you must be prepared to resume payments.
“Don’t lose sight of your payment due date,” said McClary. “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 end of the tolerance.
McClary says organizations like the NFCC provide student loan repayment advice to help borrowers understand which affordable repayment options best suit their circumstances and how to navigate the application process.
The final result
Whether you’re looking to save for retirement, set aside money for financial emergencies, or simply spend high-interest debt, making the most of the student loan repayment gap can help you achieve those financial goals.
“Use this period to increase emergency savings, pay other debts, establish regular retirement contributions and strengthen your overall finances, said Hornsby.” Think of tolerance for student loans as an opportunity to fix the holes in your roof financially so that the next time there is a financial storm, you will be well prepared for it. “