5 options for your money before student loan payments resume

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The Biden administration extended the federal student loan payment pause one final time, meaning borrowers won’t owe money or accrue interest until February 2022. While a new NerdWallet survey shows that more than a third of federal borrowers (35%) continued to repay their loan throughout the automatic forbearance, others chose or had to put that money elsewhere.

With this latest extension, federal borrowers with essentials covered have four to five additional payments they could apply to different purposes. If you’re unsure how to best use your remaining payment deferral, here are five suggestions, along with next steps in case you’re not ready to resume payments in February.

1. Save it to your emergency fund

According to the survey, about 1 in 8 federal student borrowers (13%) say they put their loan repayment money in a savings account. The COVID-19 pandemic has been financially devastating for many, highlighting the importance of emergency savings. Ideally, you’d save three to six months of expenses, but even $500 or $1,000 hidden away can make a big difference in your peace of mind and your ability to handle the unexpected.

2. Pay off high-interest debt

The survey found that some federal borrowers spent potential payment money on paying off credit card debt (20%), private student loans (12%) or some other type of debt (14%). . If you’re comfortable with how much you’ve saved for emergencies, focusing on high-interest debt can have a significant impact on your overall interest costs, especially with federal student loans at 0% interest for the next few months.

3. Avoid high-interest debt

Speaking of high-interest debt, a credit card balance of $1,000 with an interest rate of 16% would cost $160 in interest charges if held for a year. If you don’t have high-interest debt, but you have upcoming purchases that you would otherwise have left on your credit card — like a home improvement project or vacation expenses — you can use money from a potential federal loan payment to pay for these purchases in advance. This way, you can avoid the interest charges and stress that can come with a high credit card balance.

4. Put it aside to pay all at once

Although payments aren’t due now, your main financial priority may be paying off your federal student loans. You can make monthly payments as usual or keep the payment money and make a large payment just before the break ends. With this approach, you have cash in hand as a buffer in case something goes wrong. If nothing happens, you can avoid the interest you would otherwise accrue on the student loan principal.

5. Contribute to an IRA

According to the survey, about 1 in 6 federal student borrowers (16%) say they invested the money that would otherwise go towards their retirement loans. If you’re comfortable with how much you have in emergency savings and aren’t paying off high-interest debt, you can choose to put potential payout money into an IRA.

An IRA is a tax-advantaged retirement account that a person with taxable income (or someone who has a spouse with taxable income) can contribute to. The current annual limit is $6,000, or $7,000 for people age 50 and over. IRA contributions for 2021 can be made up until your tax return filing deadline, so even the money from January’s loan repayment can help boost your retirement savings and potentially save you money. reduce your taxable income.

If you can’t make payments, consider the next steps

About a third of federal borrowers (34%) say they use loan repayment money for necessities, like rent and food, which could indicate that those expenses might not otherwise be covered. When asked when it was financially possible for them to start repaying their loans, 11% of federal borrowers said 2022 or beyond and 10% of borrowers said they didn’t know when they could, according to the survey. .

If it’s not realistic for you to start making payments again in February, you have options to avoid defaulting on your loans. For borrowers who cannot pay the full amount owing, a income-based repayment plan might be a good option. It caps your monthly payments at a certain percentage of your Discretionary Income and forgives the remaining balance after 20 or 25 years, depending on the specific payment plan you have entered into.

If you meet the eligibility requirements – for example, if you are unemployed, receiving social benefits or undergoing cancer treatment – student loan deferral will completely suspend your payments and may even stop earning interest (depending on the type of loan you have).

If you are not eligible for deferment, student loan forbearance is also an option. You can suspend loans for up to 12 months at a time, but you will accrue interest regardless of your loan type. All of these alternatives to a standard repayment plan can cost more in interest and time over the life of a loan. But they can also provide you with some needed breathing room if your budget just won’t allow you to pay off your student loan right now.

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Darcy J. Skinner