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Student Loan Relief: Keep Paying or Hit Pause?

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Update: The federal government extended the student-loan forbearance period to January 31, 2022.

The economic damage inflicted by the COVID-19 pandemic has had a domino effect on many Americans. A sudden disruption in income is exacerbated by the need to somehow keep paying the bills.

One of those dominoes is student loan debt. In the United States, 45 million borrowers owe $1.6 trillion in student loan debt—trailing only mortgage debt. Even before the pandemic hit, approximately 11% of federal loans were at least 90 days delinquent or in default. A huge spike in delinquencies or defaults was a very real possibility after COVID-19 significantly impacted the economy.

Enter the Coronavirus Aid, Relief and Economic Security (CARES) Act. As part of the $2 trillion stimulus package in 2020, a six-month student loan forbearance was instituted by the Department of Education. Retroactive to March 13, 2020, and ending September 30, 2020, borrowers originally had a six-month period during which no payments were due and no interest would accrue. (Private loans are not eligible.) In August, this relief was extended through December 31, 2020, waiving all interest charges during this time. And it has been extended three more times since.

You can go one of two ways with this relief—continue to pay or pause payments. If you’ve remained financially sound throughout the crisis, consider taking advantage of the temporary 0% interest rate and make your monthly payments like you normally would (or even send a little more). On the other hand, a pause in payments could come in handy if there’s a pause in income. Save the extra cash or disburse it to other expenses.

Whether you continue to pay your loan or hit pause, the savings will follow.

Keep Paying

Say you’re only five months into paying back your $40,000-plus loan with a 15-year note and 5% interest rate. Because a large percentage of your payments goes toward interest early on, you would enjoy significant savings by making principal-only payments through the remainder of the forbearance period:

Loan balance: $40,000
Interest rate: 5%
Minimum monthly payment: $316
Loan term (in months): 180
Months left to pay back: 175
Total interest savings: approximately $326*

*For your December and January payments, $632 would be applied directly to your principal balance, rather than about half going toward interest.

Check out this handy calculator to see how much you could save through the end of the year.

Sock It All Away … Or Spread It Around

If you’re going through a difficult time financially, pausing your student loan payments could go a long way toward helping you stay afloat. Using the above scenario, if you stopped payment on your loan for six months, you’d have close to $1,900 extra to either put in savings or toward other bills.

If your income has remained steady during the pandemic, you can still benefit from the forbearance. Use the extra funds to help pay off higher-interest debts, pad your emergency savings, or invest in an IRA or other savings product. And even if you’re behind on payments, your loan will be considered “paid on time” during the forbearance.

The CARES Act student loan forbearance carries benefits any way you treat it. Whichever option you choose, every little bit will help—even for a short time.

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