Should I use student loan forbearance to pay off other debt?
With the current forbearance of student loans, do I still have to make payments even though I don’t have to and the interest doesn’t accrue?
With COVID-19, I can work from home and have had no reduction in income.
I have other debts that I could use my regular student loan to pay off faster, but it would be nice to pay off my student loan balance faster without paying interest. What is my best option?
For dozens of people who are struggling today, tolerance offers much-needed relief. But for people like you who haven’t been financially affected by COVID-19, this is a welcome chance to move forward.
Very quickly, here is what happens with student loans: All student loans held by the federal government have been automatically placed in abstention March 13. Payments are suspended until September 30. No interest accumulates. If you made a payment after March 13, you can even request a refund from your provider.
So that means you can take advantage of this time to make more progress on debt that still bears interest, or continue to pay off your student loans so that your entire payment goes to principal, not interest.
But I’m not convinced you should be doing either of these things. You say you can work from home and you haven’t lost any income. I sincerely hope that your situation will remain so.
Yet before I spend that money on debt, I have to ask you: how long could you stay afloat if you lost your job tomorrow?
The crisis we find ourselves in has taught us how essential it is to have an emergency fund. Over 30 million jobs have been lost, and many of these people are still waiting to receive unemployment benefits.
If you don’t have an emergency fund that could go three to six months without a paycheck, I urge you to consider putting what you usually pay for your student loans into a savings account instead. An emergency fund helps you avoid going into debt because you won’t need to charge a credit card with expenses if your income suddenly drops.
But if you have healthy savings and your job is secure, then I’m all for using the forbearance period to fight debt.
If you have credit cards, I suggest you start there, because for most people, credit card debt has the highest interest rate. Try to allocate your regular payment to the best balances you have available. If you pay the highest interest balance, switch to the one with the next highest interest rate. In debt repayment circles, this is called the debt avalanche method.
An added benefit to paying off credit cards is that it reduces your credit utilization rate, provided you do not increase the balance again, which increases your credit score.
Of course, private student loans are not covered by automatic forbearance. So if you have them, you can consider using this reprieve to reduce the balances that are still earning interest.
I think it makes sense to keep paying off your federal loans so that you can tackle the principal as much as possible if you don’t have high interest debt – with two exceptions.
If you are on a income based repayment plan, your suspended payments will count for forgiveness. If you work for Public service loan remission and you have a direct loan, your suspended payments will also count towards the remission, as long as you are still working for an eligible employer, such as the government or a non-profit organization.
Translation: If you made your payments during the forbearance period and ultimately qualified for a discount through either option, you would have lost six months of payments. So, for those who are enrolled in either program, a better option may be to put the money in a savings account. If you left either program, then you could use the money you saved on your loans.
Student loans are an already complex subject, but the temporary forbearance makes it even more confusing. The Ministry of Education has updated frequently Coronavirus and Forbearance FAQs for Students, Borrowers, and Parents on its website, Studentaid.gov, it is quite informative and easy to understand.
No matter what you choose, it looks like you are in a good position to use that time to improve your finances. Whether you spend your freed up money on savings or debt, you will be making a wise decision.
Robin Hartill is a Certified Financial Planner and Editor-in-Chief at The Penny Hoarder. Send your sensitive money questions to [email protected].
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