It’s a hot topic: should you pay off yours? Student Loans during COVID-19?
Here’s what you need to know – and the answer might surprise you.
Is that even a question we should be asking ourselves? Does it make sense to pay off your student loans after a global pandemic? It depends on. For some people, there are much better ways to spend your money. For others, it can be one of the smartest financial moves you can make. Let’s dive in.
Federal student loan
Let’s start with federal student loans. The CARES Act – the $ 2 trillion stimulus package to help Americans financially during the COVID-19 pandemic – offers the federal government several benefits Student Loans Borrower. The CARES law provides for the following benefits from March 13, 2020 to September 30, 2020, among others:
So if you are under no obligation and incurring no interest, should you be making federal student loan payments at all during this period? It depends on.
If you are unemployed or on leave: No, you shouldn’t be paying your federal student loans. Save your money on basic living expenses and other necessities.
If you are enrolled in an income-based repayment plan: Income-driven repayment plans can cut your monthly payment down to as low as $ 0. Most borrowers won’t pay during this time, but the decision is yours. If you choose not to pay, your non-payments will still be “offset” against your required payments to receive the student loan. However, Remember that you owe income tax on the amount of student loan waiver you received.
If you are planning on obtaining public service loans: Your monthly non-payments will count towards the 120 payments required. Unlike income-based repayment plans, you don’t owe any income tax on the amount of your student loan waiver. You do not have to pay during this period.
If you owe high-interest credit card debt: If you decide between paying credit card debt and student loan debt during this period, it is better to pay off the higher interest debt (credit card debt) first. Higher interest debts are more expensive due to the higher interest expense.
If you are employed and have financial means: You should consider paying off your federal student loan. Why? After September 30, 2020 (without renewal), you still owe your outstanding principal plus any accrued interest. Your student loan balance will not be lost. Even if the interest rate is 0%, this is a good time to reduce your principal balance. If you can lower your student loan, you will save money over time because your interest rate will be calculated from a smaller number. The more you can reduce your primary balance during this time, the more money you will save over time. This is a once in a lifetime opportunity – if you have the financial means – because no interest accrues during this time.
Student personal loans
The CARES Act only applies to federal student loans and does not private student loan. You will still need to make monthly payments and interest on your personal student loan. That is, many Lenders in certain states offer deferral options to borrowers who may be struggling with personal student loan payments. You can inquire with your private student loan service provider whether this option is available to you. Most importantly, make sure you understand the financial implications of a break in payments. Again, if you have the financial means to make additional student loan payments during this period, paying off the student loan faster is a smart financial move. For example, let’s say you have a student loan of $ 50,000 and an interest rate of 8%, and you increase your monthly payment by $ 100 per month. You would save $ 4,923 and pay off your student loans 1.99 years earlier.
this Student loan payout calculator shows how much money you can save by making additional payments of any amount.
Helpful Resources: Student Loans
More options for your student loan
Here are four options to consider during this time, all of which have no fees: