Student loans are paused – Should you still pay?

On his first day in office, Joe Biden signed an executive order helping the 41 million Americans who hold Federal student loans.  Until September 30th, Federal student loans are 0% interest with no payments due. Biden is also considering a large array of different proposals on student loans ranging from changing the income-based repayment plans to 5% instead of 10% of your income to making community college and public universities tuition free.  You may be wondering should I pay off my student loans during COVID?

Here is my take on how to respond:

If you have less $50,000 in Federal student loans wait to pay it all off.  The Biden Administration has said they’re in support of forgiveness for $10,000 in student loans.  However, Biden has also indicated that he will not use an Executive order to forgive student loans and will wait on Congress to act.  Even if proposals on the left for $50,000 in loan forgiveness make it through, it is highly unlikely ALL federal loans will be forgiven.  What does that mean for you?  You can put any dollars you are ear marking for loan forgiveness into a high-yield savings account so it’s earning you interest while Congress waits to act and interest for Federal loans is on pause.  You can make a lump sum payment to your highest-interest loan once interest and payments on your Federal loans resume.

Keep paying on private loans.  They unfortunately aren’t impacted by this pause in Federal loans. You can use money you’re saving from your Federal loan payments to chip into the total owed on your private loans.  Finally, while Biden cannot pause or forgive private loans, he does want to make it easier to get rid of private student loan debt in bankruptcy.

Pay-off any high-interest debt (anything over 5%) like credit cards or a car payment.  The average interest on credit card debt is 15% or higher.  While many had to use credit cards to finance a pushed out start date or to cover expenses from a lost job, now is a great time to pay off debt using money freed up by the pause in Federal loans.

Build up a 5-6 month emergency fund. This will keep you from ever going into credit card debt and will give you a buffer if you lose your job or cannot work for a period.

Live at home as long as you can.  If you just graduated or moved home during COVID, waiting to move out 2-3 months, can help you save $5K, $10K, $15K or more.  Sent rent is generally 15-30% of your total paycheck, the longer you can hold out, the better for your bottom line.  Plus, the perks of city living are much diminished right now.  You can do a Zoom Bumble date from anywhere.

Use this time to catch up on retirement savings.  If you aren’t saving 12% of your pre-tax income for future you, this is a great time to start.  The power of compound interest means the earlier you start saving the less you have to save.  Someone who starts saving at 25 and invests $10K / year over 15 years, will still have over $200K more at 65 than the same person who saves $10K / year over 30 years but starts at 35.

when to not pay off your loans

If you are working towards Public Service Loan Forgiveness or are on an Income-Based Repayment plan, do NOT make payments now.  If your ultimate plan is to have your loans forgiven, the current period of 0% interest and no payments due counts towards your progress.  With Public Service Loan Forgiveness, as long as you are working for a qualifying employer, the period from January to September 30, 2021 will count as 10 months of “payment” towards loan forgiveness.  Similarly, if you are on an income-based repayment plan like REPAYE or PAYE, this 10-month period will count towards your 20-25 years of payment before loan forgiveness.  Making payments now won’t get you ahead.  It will just increase the amount you pay and reduce what is ultimately forgiven.

Note: If you are planning to apply for Public Service Loan Forgiveness, make sure you have certified your employment.  Biden is considering changes to this program to make it easier and faster to get your loans forgiven.  He has proposed forgiving $10K / year every year for five years for a max of $50K.  However, for many physicians, lawyers, and others with high debt loads, $50K in forgiveness may only constitute a small fraction of your loans.  Making sure you have certified your employment will ensure you are set up in the program and are grandfathered in to any changes.

when to pay off your loans

If you are checking off all these other goals (no high-interest debt, established emergency fund, saving 12% or more for retirement) and you have more than $50,000 in Federal student loans, then it makes sense to keep paying.

What questions do you have about student loans?  I have paid off $150,000 in student loans and would love to help you do the same.  Send me an email at eryn@herpersonalfinance.com.