How Borrowers are Using the Money Saved by Administrative ForbearanceMay 7, 2021
Update 12/22/2021: On Dec. 22, 2021, the U.S. Department of Education (ED) extended the student loan payment pause through May 1, 2022.
Right now, student loans owned by the Department of Education are in administrative forbearance and federal student loan interest is suspended until at least September 30, 2021.
If you’re taking advantage of this student loan forbearance period, there are a few things you can do to use the money you’re saving to improve your financial situation:
What is Administrative Forbearance for Student Loans?
Due to the coronavirus pandemic, federal student loan payments were put into forbearance. While the original forbearance period was scheduled to end on September 30, 2020, student loan forbearance was later extended until September 30, 2021. There is a chance that it could be extended again, but for now, you should plan on resuming student loan payments on that date.
How does student loan forbearance work?
Borrowers don’t have to worry about making payments on their qualifying student loans owned by the Department of Education. Additionally, interest isn’t accruing on these loans right now. On top of that, during this student loan forbearance period, each monthly payment of $0 still “counts” toward Public Service Loan Forgiveness.
As a result, borrowers may choose to save some of their money and put it toward other goals. This student loan forbearance period could allow you to build a stronger financial foundation.
How to Take Advantage of Student Loan Forbearance in 2021
While you’re enjoying federal student loan forbearance, here are some ways you can use the money to get ahead on other financial goals:
Pay down private student loans
Private student loans aren’t included in federal student loan forbearance, so you don’t get a break on those payments. If you want to tackle those loans, you could double up on your payments, reducing what you owe overall. Depending on your interest rate, this could be one way to see guaranteed returns for your money.
Refinancing private student loans can also be a great option for borrowers with a low debt-to-income ratio and high credit score. By refinancing with a new student lender, you could potentially lower your interest rate or your monthly student loan payment.
Since federal student loan payments are temporarily suspended, this could also be the right time for some borrowers to start investing.
In fact, it appears that many consumers have already used their stimulus payments from the government to trade in the stock market. For those earning between $35,000 and $75,000 annually, trading increased by 90% the week after receiving a stimulus check.
Increase retirement account contributions
Rather than using a taxable investment account, though, other borrowers may choose to increase their retirement account contributions. A retirement account comes with tax benefits that can allow money to grow more efficiently over time.
The average student loan payment is $393 per month. If you were to put that money aside for six months in 2021, that would total $2,358. Even if you didn’t put any extra in, after 30 years, assuming 8% annualized returns, you’d have an extra $23,727.74 in your retirement account. That’s on top of what you’re already setting aside for retirement.
Tackle high-interest debt
If you have high-interest debt, like credit card debt, it can make sense to pay that down at a faster rate. As of May 3, 2021, federal student loan interest rates range from 2.75% to 5.30%, although interest isn’t currently accruing. On the other hand, the average credit card interest rate was 16.28% in 2020. For those carrying credit card debt, diverting those student loan payments toward paying down that debt could save more money in the long run.
Save for a home
For those hoping to buy a home in the next year or two, setting aside extra money each month can help you reach that goal a little bit faster. Saving for a down payment can feel like a daunting task, but thanks to the student loan forbearance period, you may able to get a jump start on saving for your next home.
Boost your emergency fund
Now might also be a good time to boost your emergency fund. With student loan forbearance in 2021, you could save what you’re not paying for a rainy day.
Consider using a high-yield savings account for your emergency fund. With an emergency fund, you’re less likely to need to use debt to cover unexpected expenses, helping you establish a sturdier financial foundation.
Prepare for the End of Student Loan Forbearance
Now that you know how student loan forbearance works and what you can do with the extra money, you also need to be ready for the end of administrative student loan forbearance in 2021. Take a look at your finances and review your payment plan. You might have to begin making payments, so be prepared to adjust your budget accordingly.
If you have private loans, your positioning during the federal student loan forbearance period might allow you to refinance those loans to a lower rate in the future, saving you even more in the long run. Carefully consider your options and make the moves most likely to benefit your finances later.