How to use your student loan money while paying off

In 2020, the pandemic has uprooted large parts of our daily lives and stopped regular activities, such as going to the office in person five days a week, socializing with large groups, travel, etc.

While some of these activities are back in full force, one change during the pandemic has yet to return: federal student loan payments. And for many borrowers, it’s a financial lifeboat.

What’s the deal with federal student loans

The pandemic has led to massive layoffs, high inflation, supply-chain disruptions, and more. And in the face of it, the Trump administration has moved to provide some financial relief for student loan borrowers troubled by high interest rates and large loan balances.

On March 13, 2020, all eligible Federal student loans were placed into administrative forbearance, automatically stopping payments and setting interest rates at 0%.

Since the spring of 2020, this student loan moratorium has been extended several times and many borrowers have not made any payments for nearly three years. In fact, 57% of borrowers did not make a payment during the suspension, according to a NPR/Ipsos poll.

At the time, lawmakers proposed long-term solutions in the form of debt relief programs to address the growing student loan debt crisis—with the nation’s current student loan balance of $1.7 trillion. , debt to 48 million borrowers. President Biden has proposed a plan to forgive up to $10,000 to $20,000 per federal borrower who meets certain requirements—though this proposal faces a long battle and court orders prevent the Department of Education from discharging student loan debt and accepting additional applications for relief. Without further extension or permanent legislation, the student loan moratorium is set to expire 60 days after June 30, 2023.

Some borrowers continue to make monthly payments

Not all borrowers are hit with a stop on their student loan payments. The others 8.8 million borrowers have made at least one student loan payment since August 2020, and more than 40% of borrowers have made them for at least 12 months.

Paying off your student loans while your interest rate is set at zero means that all of your money goes toward your principal student loan balance, instead of interest payments — significantly reducing your repayment timeline. . And, it’s a way to keep your financial house in check and avoid going out of business before the payments resume.

“If you’ve gained financial stability in other areas, continuing to pay is probably a prudent decision. This will help you avoid letting your temporary extra cash flow create ‘lifestyle creep,’ a you have a high standard of living that will be difficult to maintain, and even more difficult to cut, if your payments continue,” says Brendan Halleron, certified financial planner, AIF®, BFA™, partner, and financial planner at Affiance Financial in Minneapolis.

4 alternatives to making your regular student loan payments

For borrowers who want to take advantage of the remaining time in the student loan moratorium, experts say there are ways to use the extra funds to get your financial home before payments start.

  1. Build your emergency savings. If you don’t have one emergency reserve, you may want to consider allocating the amount you pay off your student loans each month to a high-yield savings account. “In general, we recommend having three months’ worth of living expenses in a high-yield savings account for unexpected life expenses (eg, job loss, car repairs , health emergency, etc.)” said Halleron. “Having this account at a separate institution rather than a checking account helps create a barrier to accessing money for non-emergency situations. And, it can earn more interest than a common savings account.”
  2. Pay off high interest debt. If you have a long time credit card debt or installment loan with a higher interest rate than your student loans, making additional payments on balances before taking on your zero-interest student loan loan can help you reduce your debt in general and cut your payment timeline.
  3. Put more funds for your investments. If you haven’t already investments a priority due to the lack of available funds, this could be your chance to put some of your money in the market. In fact, many investment accounts require as little as $1 to get started. However, be warned, investing always involves some risk. This is a step you should consider after taking care of your larger financial obligations.
  4. Use it to top up your retirement account. A way to use your extra funds and reduce your taxable income for 2022 is to make contributions to your traditional or Roth individual retirement account (IRA). You can still make contributions until April 18, 2023.

The takeaway

While you wait for lawmakers to make a decision about the fate of your student loan balance, make a plan for how you’ll use the extra money each month to make the biggest impact and get closer to achieving of one of your financial goals.

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