What to Do While Your Student Loans are Paused during COVID

 
Federal student loan borrowers were big winners in the $2 trillion COVID stimulus bill: all federal student loans are paused until the end of September, 2020.

No interest builds on the loans. The months will count towards student loan forgiveness.

So what should you do while your student loans are paused during COVID?

I’ve unfortunately seen many people share bad advice. Some of the advice is from borrowers who don’t understand all the complexities of student loans and aren’t deep into personal finance. Others have come from people in personal finance with huge followings, which is really unfortunate.

Before we go into what you should do, let’s level-set on what the CARES Act actually said.

Student Loan Relief the COVID Stimulus Bill (CARES Act) Provides (And Doesn’t Provide)

 
I gave a detailed analysis of all the impacts to student loan borrowers, but the key highlights for federal student loan borrowers include:

• All federal student loans will suspend payments for six months, ending September 30th, 2020

• This will happen automatically – borrowers do not have to do anything for payments to be suspended

• Interest will not accrue during the six-month period that payments are suspended

• The six months of suspended payments will count towards Public Service Loan Forgiveness (PSLF) and income-driven loan forgiveness

It’s also worth pointing out that any auto-debit payments processed after March 13th can be refunded to you. This will be relevant to many borrowers, as the law wasn’t even passed until after March 13th.

The bad news is that all of this is only relevant to federal student loans.

Any private student loans and FFEL loans not owned by the federal government received no relief in the stimulus bill.

With these student loans you should keep making payments, if you are able to. If you are unable to due to loss of income (or any other reason), there are many loan servicers that are offering temporary forbearance (I’ve seen 2-3 months be fairly common). In these situations interest will build on your loans. You can read more about the relief available here.

Let’s move on to federal student loans that did receive generous relief under the CARES Act. What should you do with those student loans?

Should You Keep Making Payments on your Student Loans?

 
The Short Answer: No.

This is where I’ve seen tons of bad advice. I have seen many people say you should keep making payments. After all, there is no interest so if you keep making payments you have an opportunity to knock out more of the principal.

While this is true, it makes virtually no sense to put any extra money towards your federal student loans until October 2020.

Here’s why: you have a 0% interest loan.

Instead of making monthly payments towards your student loans, you should instead put them in a high-yield savings account like CIT Bank. This serves two purposes:

• You have the cash available in case something happens. COVID has changed everything. It’s going to be more difficult to find work because businesses will be conservative from a hiring standpoint. Freelnacing will become more competitive. You may be in a good spot today, but your situation can change over the course of five months.

• You get paid interest. Making advance payments on a 0% interest loan from the government simply makes no sense. You can instead make money through interest.

The only argument for continuing to make payments is if you lack discipline and will spend the money on something else instead of setting it aside in a high-yield savings account. But the very nature of having that account set up will create discipline because it is separate from the rest of your money. You can even set up automatic transfers each month, just like how you likely are used to making automatic payments towards your student loans.

When you get to October and payments restart you can evaluate your situation and see if it still makes sense to make a big payment towards the principal of your student loans.

Check your Financial Situation

 
We are in uncertain times, and while the government has provided unprecedented economic relief for COVID, those who have a large emergency fund and no high-interest debt are naturally faring better than others.

Student loans are a drag on your cash flow, so I’m never surprised when I see student loan borrowers who have struggled to build a large emergency fund or get rid of debt.

Some financial goals you may want to focus on before making extra student loan payments include:

• Build a 6-12 Month Emergency Fund

• Pay off Credit Card Debt

• Pay off a Car Loan or other Personal Loan

• Get an Employer Match on a 401(k) or 403(b) Retirement Account

• Put Money in a Health Savings Account (HSA)

Student Loan Forgiveness? Do NOT Make Extra Payments!

 
I also want to address a final situation: those pursuing student loan forgiveness.

Despite being around for years, many borrowers either do not know about student loan forgiveness or haven’t looked into it. You can read our posts about Public Service Loan Forgiveness (PSLF) and income-driven loan forgiveness for an introduction.

If you are going down the path of student loan forgiveness, you should never make extra payments towards your student loans.

This is relevant not just during the months where student loan payments are paused, but all the time. The goal of student loan forgiveness is to maximize the amount you get forgiven, which means paying as little as possible towards your loans.

By paying less towards your loans you have more money to save and invest, which will make you more and more comfortable with the idea of loan forgiveness. (for those who need it, here is why fears around student loan forgiveness are overblown)

Be Ready When Student Loan Payments Resume: Create a Student Loan Strategy

 
One thing I want to make clear is that COVID has taken a toll on everyone, whether that is financially, mentally, emotionally, or otherwise.

You do not need to be productive while dealing with the COVID pandemic.

For millions of people, simply getting through the next day or week is all that matters.

With that being said, one thing that can be helpful is taking this time to learn about student loan debt and repayment strategies.

My wife and I went from being stressed about our $100k+ of student loan debt to feeling great about our student loan repayment strategy, which was a combination of pursing PSLF for my wife’s direct loans, refinancing my student loans, and paying off our low-interest Minnesota student loans on the standard ten-year repayment plan.

Student loans are complex and even many personal finance bloggers who spend most of their free time reading, writing, and researching personal finance do not understand the ins and outs of student loan repayment.

First, download our student loan spreadsheet. This will give you a snapshot of your student loan information in one place. The spreadsheet also has multiple calculators and tools that will help you form your student loan strategy.

Second, my book Student Loan Solution: 5 Steps to Take Control of Your Student Loans and Financial Life will take you through a step-by-step process that formulate a student loan strategy unique to your life, all while giving you a bunch of tips to improve your greater financial life.

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• Get our FREE Automated Budget Spreadsheet and our Student Loan Spreadsheet

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