Why Save Student Loan Payments During Federal Forbearance
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- If you plan to make payments on your student loans during forbearance, a financial planner suggests keeping the money you would have spent on your loans in a savings account while you can.
- Once the federal forbearance ends on September 30, 2020 and payments are due again, you can choose to use that money to start paying off loans, increase your emergency fund, or pay extra on your loans. students.
- Given all the uncertainties, keep cash should be a higher priority right now than paying down debt for the most part, she said.
- Learn more about obtaining or refinancing a student loan with CommonBond »
All federal student loans are forborne and no payment is required before September 30, 2020.
According to the CARES law which established forbearance, student loans will not earn any interest and there is no penalty for non-payment. This forbearance does not apply to PLUS loans or private student loans.
If your loans are forborne under the CARES Act but you still want to make payments, you can call your lender to reactivate your payment plan. You can even choose to put extra money into your loans if your income is stable and you save money elsewhere. However, at least one expert advises against it: it is better to save money in your emergency fund.
If you have extra cash on hand, keep it
“I told people who have federal loans that are currently on hold to save each month, if they can afford it, what they would normally pay for their student loans on a monthly basis,” says financial planner Samantha Gorelick from Brunch and budget.
For most people, cash savings are of the essence right now. The coronavirus caused high unemployment rates across the country, and many financial instability. As the pandemic continues, keeping savings on hand is the best defense against having to take on high interest debt like personal loans or credit card debt in the event of the unexpected. Personal finance expert and author Ramit Sethi recommends that people increase their emergency funds to 12 months value of savings, considerably more than typical tips of three to six months.
Taking advantage of the break in your student loan payments could allow you to focus on building that emergency fund. The average student loan payment in the United States is $ 393 per month, Business Insider Hillary Hoffower reports. Between July and the end of September, the average student loan borrower could save $ 1,179 with their student loan payments alone. For those who don’t have a full semester emergency fund, this is an opportunity to start one or basically do it for up to a full 12 months of savings.
Keep the cash on hand until you are sure you don’t need it. “In September, before the loans fall due, people can then decide whether they are able to put extra money into their loans or keep that money in their savings,” Gorelick said.
Usually, she doesn’t recommend saving over paying off debt.
While Gorelick says she wouldn’t normally recommend saving instead of paying off debt, this situation presents a rare opportunity.
“I’ve always encouraged people to reduce their debt and save, but that’s just not possible for a lot of people right now,” she says. And, for the very first time, there is no need to repay the loans right now. Repaying loans is particularly not a good decision for people with income-based repayment plans. For people on these plans, the six months of abstention will count towards their total as active payment months, whether or not borrowers pay.
During the pandemic, Gorelick and her clients “put a lot of emphasis on paying down debt and a lot more emphasis on saving,” she says. With unemployment rates still high and situations changing daily, keep the money close could give you flexibility now and security for the next few months.
“Once you pay that debt, the money is gone,” Gorelick says.