Uses for Your Money Before Student Loan Deferment Ends

While loan payments are paused, you shouldn’t just sit on your money

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 temporary deferment 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

While the original deferment period was only expected to last several months, it has been extended six times since then, with the current extension lasting through Dec. 31, 2022.

By and large, this means borrowers with eligible federal loans still have the summer of 2022 to delay payments and avoid interest before having to deal with their federal student loans again. There’s also a chance that President Biden could extend the emergency deferment period for several more months, although no one can say for certain if that will happen.

If you are worried that you only have a few more months with no student loan payments and 0% interest, you might be looking for ways to make the most of this time. Read on to learn about the best uses of your extra money for the rest of the summer, or until whatever date in the future when loan payments pick back up.

Key Takeaways

  • The U.S. Department of Education worked with the federal government to enact emergency deferment of eligible federal student loans due to the COVID-19 pandemic.
  • Measures included payment suspensions, 0% interest, and the cessation of collection activity.
  • The original deferment period began in March 2020 but was extended six times since then.
  • The deferment period is supposed to last through Dec. 31, 2022, which means if this period is not extended further, eligible borrowers will have to make payments again starting in January 2023.
  • There are several ways to prepare for the inevitability of student loan payments restarting, as well as several smart uses of any extra cash you have until that day comes.

Pay off High-Interest Debt

If you are carrying balances on credit cards that charge a high annual percentage rate (APR), it makes more sense to pay these down than to make payments toward federal student loans. After all, rates on eligible federal student loans are set at 0% through at least the end of 2022, while the median credit card interest rate is currently 20.99%. (This figure is based on data collected from credit cards in the Investopedia card database as of September 2022.)

Paying off credit card debt is more rewarding than loans at a 0% rate since you get to save money on interest right away. Plus, you can save a lot on interest with extra payments depending on your interest rate and how much you owe.

As an example, paying $100 per month toward a $5,000 credit card balance with a 19% APR would cost you $4,718 in interest payments alone over the 98 months that it would take you to become debt free; however, boosting that payment to $400 per month would leave you paying off your debt for just 14 months, and your total interest payments would only add up to $523.

Pay off Private Student Loans

Most borrowers with student loans know that the current deferment of payments and fixed 0% rate only applies to eligible federal student loans. This means that borrowers with private student loans have been on the hook for payments this entire time, and interest has been accruing on their loans throughout the pandemic to boot.

With that in mind, it can make sense to focus on paying off private student loans and halting payments on federal loans right now. By funneling your extra cash toward private student loans, you can save on interest and pay down these loans faster without any impact to your federal loan balance or total interest owed.

Pay off Federal Student Loans Anyway

If you don’t have other debts to speak of but do have some extra cash, it can also make sense to continue paying off your federal student loans during the deferment period. The fixed 0% interest rate ensures that every penny you pay toward federal loans goes toward the principal of your balance right now. This means that you can save money by not paying interest on those balances later, and you can also speed up your repayment timeline.

In August 2022, President Biden announced student loan relief for eligible borrowers. Individuals whose income is less than $125,000 ($250,000 for couples) and who received a Pell Grant at school are eligible for debt cancellation for up to $20,000. Those who did not receive a Pell Grant are eligible for up to $10,000.

On Nov. 11, 2022, federal courts issued orders to block the plan from going through. The Department of Education said it was working to get the decision overturned. As a result, it announced it stopped accepting new applications for loan forgiveness until further notice but put existing ones on hold.

Build an Emergency Fund

Not sure what to do? In that case, 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.

Is It Smart to Pay off Student Loans During Forbearance?

Paying off student loans during this period of forbearance can make a lot of sense if you have extra cash to spare. The 0% interest rate ensures that every penny you pay right now goes directly toward the principal of your balance. This can help you save on interest later while accelerating your loan payoff date.

How Do I Find My Student Loan Servicer?

To find out who is servicing your federal student loans, you can visit your account dashboard and scroll down to the “My Loan Servicers” section. You can also call the Federal Student Aid Information Center (FSAIC) at 1-800-433-3243.

Can I Use Student Loans for Rent?

Student loans can be used to pay for room and board, which would include 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 end up costing significantly more than an on-campus dorm.

The Bottom Line

If you have federal student loans that you could make payments toward right now but are not sure whether you should, it’s probably best to focus on your other debts first. With the interest rate on eligible federal student loans currently set at 0% through Dec. 31, 2022, waiting to pick back up with those payments won’t cost you anything.

In the meantime, you have a window of time to 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. If you’re not sure what to do quite yet, then saving your extra money in a high-yield savings account is probably your best bet.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Federal Student Aid. “COVID-19 Emergency Relief and Federal Student Aid.”

  2. The White House. "Fact Sheet: President Biden Announces Student Loan Relief for Borrowers Who Need It Most."

  3. Federal Student Aid. "Student Loan Debt Relief Is Blocked."

  4. Wells Fargo. “Saving for an Emergency.”

  5. Vanguard. “What’s the Right Emergency Fund Amount?

  6. Sallie Mae. “From Books to Burgers: What Private and Federal Student Loans Can Be Used For.”

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