If you have federal student loans, it’s likely that you haven’t had to make payments for quite some time now. News has recently come out about the Biden Administration’s plans for up to $10,000 in student loan forgiveness and freeze payments until September 30th.
These policies do NOT affect private student loans. If you are unsure whether your loan is private or federal, login to studentaid.gov with your FSA id. Alternatively, you can check with your loan servicer.
This pause and the potential relief is a huge opportunity if you have student loans. It gives you the flexibility to fund other priorities without worrying about your student loans accumulating interest. Some may be tempted to continue paying down their student loans while no interest is accumulating. But I would caution you to think twice before making any big moves with your loans. Here’s why:
Right now is not an ideal time to be aggressively paying down your student loans; especially if you have less than $10,000. Were you to pay off your student loans, and new legislation granted relief of such loans, you could be left out.
You should also avoid refinancing your federal student loans. If you refinance your student loans, you are making them private (i.e. the government does not refinance student loans). Taking your loans private will mean payments start back up and you will no longer qualify for future student loan forgiveness. Further, you lose the ability to use income-based repayment plans that federal loans offer.
Some people like the idea of paying down their loans while interest accumulation is halted. This is because you can pay them down quicker, but I would again caution you. Paying down a loan charging zero percent interest, you are forgoing the chance to pay down a higher rate debt. For example, if you have a credit card balance with a 20% interest rate and student loans with a 6% interest rate, currently on hold, it makes more sense to pay off those credit cards.
If you have no other debt obligations, you should consider saving the payments in a savings or retirement account. A savings account is unlikely to earn a lot of interest, but you can always pull the money out of the saving account at the end of the moratorium period to make a lump sum payment on your student loans. A retirement account such as a Roth would be a fantastic use of your student loan savings as the growth in such an account can easily exceed the interest rate on your student loans.
Whatever you decide to do with the savings, you should avoid getting too comfortable with the extra money. Future student loan forgiveness is far from certain and payments will begin again before you know it. You would be wise to take advantage of this opportunity and make the most of it.
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Erik Goodge is a CERTIFIED FINANCIAL PLANNER™ and the President of uVest Advisory Group. He holds a B.S. in Economics and Cognitive Science from the University of Evansville. Erik is a Marine Corps veteran of the Afghanistan campaign and Purple Heart recipient. He is from Evansville, Indiana, and currently lives in near-by Newburgh with his wife and daughter.