Education Secretary Betsy DeVos (AP Photo/Alex Brandon)
It’s a hot topic: Should you pay off your student loans during COVID-19?
Here’s what you need to know – and the answer might surprise you.
Is this even a question we should be asking? In the wake of a global pandemic, does it make sense to pay off your student loans? Well, it depends. For some people, there are much better ways to spend your money. For others, it can be one of the smartest financial moves that you can make. Let’s dive in.
Federal Student Loans
Let’s begin with federal student loans. The CARES Act – the $2 trillion stimulus package to provide financial support to Americans during the COVID-19 pandemic – provides multiple benefits to federal student loan borrowers. For example, among other benefits, the CARES Act provides the following from March 13, 2020 through September 30, 2020:
So, if you’re not required to and no interest accrues, should you even make federal student loans payments during this period? Well, it depends.
If you’re unemployed or furloughed: No, you shouldn’t pay your federal student loans. Save your money for essential living expenses and other necessities.
If you’re enrolled in an income-driven repayment plan: Income-driven repayment plans can reduce your monthly payment to as low as $0. Most borrowers won’t pay during this period, but the decision is yours. If you decide not to pay, your non-payments will still “count” toward your required payments to receive student loan forgiveness. However, remember that you will owe income tax on the amount of student loan forgiveness you receive.
If you plan on public service loan forgiveness: Your monthly non-payments will count toward the required 120 payments. Unlike income-driven repayment plans, you won’t owe income tax on the amount of your student loan forgiveness. So, you don’t need to pay during this period.
If you owe high-interest credit card debt: If you’re deciding between paying credit card debt and student loan debt during this period, it’s better to pay off the higher interest debt (credit card debt) first. Higher interest debt is more expensive given the higher interest expense.
If you’re employed and have financial resources: You should consider paying your federal student loans. Why? After September 30, 2020 (absent any extension), you’ll still owe your outstanding principal balance plus interest that will start accruing again. Your student loan balance is not going away. Even though the interest rate is 0%, this is an opportune time to reduce your principal balance. If you can lower your student loan balance, you will save money over time because your interest rate will be calculated off of a smaller number. The more you can reduce your principal balance during this period, the more money you’ll save over time. This is a unique opportunity – if you have the financial resources – because no interest is accruing during this time.
Private Student Loans
The CARES Act only applies to federal student loans, and not private student loans. For your private student loans, you’re still required to make monthly payments and pay interest. That said, many lenders in certain states are offering forbearance options for borrowers who may be struggling with private student loan payments. You can check with your private student loan servicer if the option is available to you. Most importantly, make sure you understand the financial implications of any payment pause. Again, if you have the financial resources to make additional student loan payments during this period, it’s a smart financial move to pay off student loans faster. For example, let’s assume you have $50,000 of student loans and an 8% interest rate, and you increase your monthly payment by $100 a month. You would save $4,923 and pay off your student loans 1.99 years earlier.
This student loan payoff calculator shows how much money you can save when you make extra payments of any amount.
Helpful Resources: Student Loans
More Options For Your Student Loans
Here are four options for you to consider during this time, all of which have no fees: