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If you have student loan debt, you may already be aware that federal student loan payments were temporarily suspended by the Coronavirus Aid, Relief and Economic Stimulus (CARES) Act. Under the new law, payments for federal student loans are suspended until September 30, 2020, during which time no interest will accrue on outstanding debt.
With so many Americans saddled with student debt, this measure goes a long way to help borrowers who may be financially strapped as a result of COVID-19. But just because student debt payments aren't due, that doesn't necessarily mean you shouldn't continue making payments.
Read on to see how the law impacts you and why paying your loans during this time—if you have the means—could save you money over time.
How Has Federal Student Loan Repayment Changed During COVID-19?
In addition to the other economic aid provided by the CARES Act—including for unemployed workers and small businesses—the law outlined several ways that student loan repayment would temporarily be altered. Policy changes include:
- All payments for federal student loans will be suspended through September 30, 2020. This only includes direct loans and FFELs (Federal Family Education Loans) serviced by the federal government and does not apply to privately held loans.
- No interest will accrue on your federal student loans through September 30, 2020.
- All involuntary collection of student loan debt—through wage garnishment, Social Security garnishment and tax refund offsets—will be suspended.
- The federal government will report suspended payments as current to the national credit bureaus—which means skipped payments on eligible loans during this period won't appear as late on your credit report or impact your credit scores.
There's no need to apply for this assistance. If your student loans are eligible, the assistance will automatically be applied to your account and any scheduled payments should be paused by your loan servicer. If you are unsure whether your loans are eligible, contact your loan servicer for more information.
Should I Stop Paying My Student Loans?
Your decision about whether to stop paying your student loans will ultimately depend on your financial situation. If you need the extra money now or are worried about your finances, this payment pause could offer welcome relief. But if you're financially stable and want to continue making your payments, doing so could save you money in the long run.
Take inventory of your current finances and consider these options if you have federal student loans:
- You're financially stable: If you don't envision needing any extra cash in the coming months, you could continue to pay your student loans as normal, which will help you save on interest charges once the no-interest period ends. But if you've got other debt, especially if it charges a higher interest rate than the normal rate on your loans, think about instead using this money to pay down those accounts.
- You fear you may face financial hardship in the near future: Consider taking the money for your student loan payments and putting it aside. It's not clear when the economic impacts of this crisis will let up, so having this extra cash might come in handy should something happen in the future. Remember that you can choose to use this cash to pay down your student loans later on, should you not end up needing the money for other things.
- You're currently facing financial hardship: If money's tight, you're better off using the funds you would have otherwise used for your student loans to pay for essential purchases like food, utilities and housing. You may not be making progress on your loans at this time, but at least you'll be better equipped to make sure you have what you need during this difficult time.
What Are the Benefits of Continuing to Pay My Student Loans?
If you're in a position to continue making payments, you should consider doing so. In fact, with interest suspended on student loans, now is one of the best times to pay down your debt as all of your payment will be applied to your principal.
If you feel that you're financially stable enough to continue to pay your student loan bill, here are two ways you can tackle it:
- Business as usual: You can continue to make monthly payments as you did before. While the payment will remain the same, remember that all of the money will go toward your principal as interest is not accruing at this time. The principal is the portion of the loan your interest payment is calculated on, so the lower that is, the less interest you will pay. Depending on the size of your loan and your interest rate, this could be a savings of thousands of dollars.
- All at once: If you're even slightly concerned about your finances but want to take advantage of the 0% interest, put your student loan payment aside each month and pay it in one lump sum before the end of the suspended period. This will give you a pad of emergency money should your financial situation change before September.
With this option, make sure you remember to make the lump-sum payment before September 30, 2020. Once your interest is reinstated, your interest payment will be determined based on your principal at the time—which will be the same as when the payments were suspended if you've held the payments to the side for that time.
Regardless of which repayment option you choose, you'll need to contact your loan servicer to reschedule your payments, as this law automatically suspends scheduled automatic payments for qualified loan accounts.
What Can I Do Instead of Paying Student Loans?
If you've decided you'd rather not pay your student loans during this period, here are a few smart things you could do with the money. Remember, if you're facing financial hardship, you should use this money for essential purchases as they come up.
- Use it to pay down your high interest credit card debt. If you have a lot of credit card debt, this could be a good time to tackle it. Credit card debt is often charged a high interest rate, which means allocating this student loan money to pay your credit card bills could save you money. If you decide to do this, pick the card with the highest interest and begin to pay down that balance first. Then, move on to the account with the next-highest rate, and so on. Eliminating the highest interest debt first will help you save more money over time.
- Create an emergency fund. If you don't already have one, consider taking this money and putting it in a savings account for a rainy day. Emergency funds are vital tools to help you plan for emergencies or anything that should go wrong in your budget.
- Put your money in a high-yield savings account. If you plan on putting this extra money aside—or if you plan to create an emergency fund—consider using a high-yield savings account. These accounts pay a higher rate of interest of up to 2% annual percentage yield (APY) versus conventional savings accounts which may only yield a fraction of a percent annually.
If you're already struggling with your student loans, or would like more information about smart repayment strategies, check out these articles by Experian to learn more: