How to Make the Most of Your Student Loan Payment Reprieve
Emerge in stronger financial shape post-pandemic
In a typical year, anyone who graduates from college in the spring with federal loans would be required to start repayment six months later, which is right about now.
Of course, there is nothing typical this year. Repayment of federal student loans was suspended when COVID hit. No payments are due through the end of the year, and the interest meter has been turned off.
That applies to everyone with federal student loans, including newly minted grads. For anyone who has lost a job, or has yet to land a job, the reprieve is a financial relief.
What happens in 2021 isn’t clear. It would stand to reason that, absent a vaccine and a strong rebound in job growth, loan payment relief would be extended. But that depends on the structure of government in Washington, and what gets done before year-end.
Strategies based on your situation:
New grad with a job. You have income. Don’t let this grace period go to waste. Check the repayment calculator (your servicer should have one) to see what your monthly payment will (eventually) need to be to pay off the loan in 10 years.
During the reprieve, shovel that money somewhere smart. If your payment is $300, ask yourself what other financial goal to tackle. Assuming you don’t have high-rate credit card debt, focus on building an emergency fund. Even if you’re living at home, and even if your parents are making the mistake — yes, mistake — of not charging rent, at some point you’ll want to launch on your own. Without an emergency fund, that’s hard to pull off, or just dangerous.
Or maybe it would feel great to save for the security deposit on the place you’ll first rent.
Or, perhaps you believe strongly that investing in your 20s is hands down the smartest way to build financial security. A Roth IRA is a fantastic option to consider:
You can also divide up your money and tackle multiple goals simultaneously.
Putting your student loan payment toward other goals now will make it easier to launch into repayment mode when we get back to “normal.” It’s the opposite of building up a spending habit you have to break.
Stopped paying, still working, stuck with credit card debt. If you previously were repaying your student loans, but still have income, whatcha doing with that money?
It may be tempting to put everything toward the high-rate credit card debt, But what happens if you need cash for some unexpected expense, or you are laid off? Having some money in savings will make it possible to refrain from adding more credit card debt. Consider using some of your suspended student loan payment for savings, some for the credit card debt.
Stopped paying, still working, in solid financial shape. Emergency fund taken care of? No credit card debt? Focus on retirement savings.
And consider resuming student loan payments. With no interest being charged, every penny you pay whittles down your principal. Once the repayment reprieve is lifted and interest is charged again, you will have a smaller remaining balance. That’s going to speed up finishing off the repayment, and it will mean lower total interest charges. Nice win.
And getting rid of this debt earlier will make it ever easier to segue into other goals. If you want to buy a home, paying off the student loan will likely boost your credit score and help with qualifying for a solid mortgage deal. It also frees up more monthly cash flow to put toward a mortgage payment.
Not working, not making payments. The reprieve was actually passed for people like you. Here’s hoping the job market rebounds swiftly, especially in your chosen field. Meantime, here are habits and resources for the job search, which should continue full blast.
Here are seven things you must include on your resume.
And nine things to leave off.