Recent measures taken by the government to help relieve financial pressures on student loan borrowers have met resistance. This resistance has made the near future somewhat uncertain for those with student loan debt.
If you're paying off a student loan, you might be wondering what to do with the money you planned to use to make payments. Read on to learn some of the ways you can use your extra money if President Biden's student loan forgiveness plan is allowed to proceed and until student loan forbearance expires and payments are required to pick back up.
- The U.S. Department of Education worked with the federal government to enact emergency forbearance of eligible federal student loans due to the COVID-19 pandemic.
- Measures taken include payment suspensions, 0% interest, cessation of collection activity, and loan forgiveness of up to $20,000.
- The original forbearance period began in March 2020 but has been extended six times.
- Student loan forgiveness was blocked by federal courts in November 2022, resulting in the Department of Education placing a hold on all payments until the Supreme Court resolves the issue.
- There are several ways to prepare for the inevitability of restarting student loan payments and some ways to use the extra cash until that day comes.
What Happened to Student Loan Forbearance?
In March 2020, the U.S. Department of Education extended an array of relief measures aimed at helping borrowers with federal student loans get through the COVID-19 pandemic. The original forbearance period was only expected to last several months, but it has been extended six times since then.
In August 2022, President Biden announced the latest extension to student loan forbearance. The temporary forbearance period applied to eligible federal student loans and included the following:
- A suspension of payments
- A fixed 0% interest rate
- A temporary halt to collections on defaulted loans
- Loan forgiveness of up to $20,000 for those that received Pell Grants and $10,000 for those that did not, subject to an income limit of $125,000 ($250,000 for couples).
In November, the extension was blocked by lower federal courts. In response, the Department of Education issued a hold on federal student loan payments until 60 days after it receives permission to continue loan forgiveness or 60 days after June 30, 2023, whichever comes first. This means you'll have until Aug. 29, 2023 before you are required to resume making payments, at the latest.
Pay Off High-Interest Debt
If you carry credit card balances that charge a high annual percentage rate (APR), it might make more sense to pay these down because federal student loan payments are on hold. If you have a credit card that hovers close to the median credit card interest rate of 21.99%, paying it down can save you a lot of money in the long run.
For example, paying $100 per month toward a $5,000 credit card balance with a 19% APR would cost you $4,718 in interest payments over the 98 months it would take you to become debt free. However, if you were to boost that payment to $400 per month, you'd pay off your debt in 14 months, and your total interest payments would only add up to $523.
Save Up To Pay Your Federal Student Loan
It is best to be prepared if the Department is not allowed to resume the loan forgiveness program. If you end up having your loan forgiven, the money would remain in your checking or savings account and you could use it for other debts or purchases.
If your regular payments resume, you might have saved enough in the interim to pay off a significant portion of your other consumer debt or use the saved money to fund payments toward your remaining student loan balance.
Pay Off Private Student Loans
Most borrowers with student loans know that the possibility of loan forgiveness or federal assistance only applies to eligible federal student loans. This means that private student loan borrowers have been on the hook for payments and accruing interest on their loans throughout the pandemic and the period following it. In contrast, those with only federal student loans have had payment relief.
If you have a combination of private and federal student loans, it might make sense to use the money set aside for your federal loans and pay it towards reducing your private student loan. By funneling your extra cash toward your private student loan, you can save on interest and pay down these loans faster without impacting your federal loan status.
Build an Emergency Fund
If you don't have any other debts to focus on, you can always start putting some money away in a high-yield savings account. Doing so could help you build an emergency fund, which most experts say should hold three to six months’ worth of expenses.
This type of fund may seem unnecessary, but your emergency fund is crucial if you want to prepare for unexpected expenses like car repairs or unforeseen events like a job loss or a severe illness.
Also, remember that you can use your extra savings to pay down student debt later once you’re ready. Either way, stashing your extra cash in a savings account will ensure that your money is actually there when you need it.
Will Student Loans Be Paused Again in 2023?
Student loan payments are on hold until 60 days after the Department of Education gets permission to resume forgiving loans or 60 days after June 30, 2023, whichever comes first.
Are Student Loans Really Going To Start Again?
The last extension of student loan forbearance was set on August 24, 2022. It was stated at the time that it would be the final extension.
Can I Use Student Loans for Rent?
Student loans can be used to pay for room and board, including off-campus housing like an apartment. However, when you factor in the cost of furnishing, meals, utilities, a security deposit, and other housing-related expenses, an apartment can cost significantly more than an on-campus dorm.
The Bottom Line
If you have federal student loans, you have several options for your money while the Supreme Court decides whether the stance against federal student loan forbearance and forgiveness will be upheld or overturned.
Until that time, you could make progress in other areas of your financial life. You could pay off high-interest debts that you have, but you could also focus on paying down private student loans or saving for the eventual return of federal student loan payments.
If you have no other debt to focus on, you could also place the money not going toward your student debt in a high-yield savings account to earn a little interest on it before you need it again.