As part of a federal response to the economic pressures arising out of the COVID-19 pandemic, federal student loan payments are currently paused, without interest, for six months. This pause ends on September 30, 2020, per a provision in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. During this time, borrowers who don’t make payments on their federal student loans won’t be penalized. The same rules don’t apply for private student loans.
For borrowers who continue to make payments on their federal loans, those funds will go directly toward repaying the principal, not the interest. If you’re in a tough economic position, this initiative can feel like a godsend.
But if you do have the funds to continue making federal loan payments, you face a question: Should you take advantage of the federal forbearance or work to repay the principal balance on your loans? Here are a few scenarios to help you decide.
You need breathing room in your budget
Have you recently lost your job, had a salary reduction or decreased hours, and need room in your budget for essentials such as groceries or rent? If so, pausing your student loan payments could free up necessary cash each month.
The question of whether to keep making your student loan payments becomes more nuanced if you haven’t lost your job yet but expect that you could.
If you use a lot of your saved cash on repaying your loans and then lose your job or experience a pay cut, you could be relying on an already depleted savings account to help you with the essentials. If you stop paying your federal student loans now, you can redirect more funds toward your emergency savings, just in case.
This strategy could leave you in a stronger financial position if you do lose your job.
For example, let’s say your average monthly student loan payment is $300 and you have $1,500 in emergency savings. That $1,500 probably won’t get you very far if you were to lose your job tomorrow, but if you stop paying your student loans in April, you could double your emergency savings by the end of the federal forbearance in September by redirecting that $300 toward your savings each month.
If you lose your job as a result of the pandemic, that gives you more breathing room than your initial $1,500 would provide.
You’re pursuing Public Service Loan Forgiveness
If you have a Direct Loan and were already on a qualifying Public Service Loan Forgiveness (PSLF) repayment plan before the CARES Act went into effect, the six months of forbearance will still count toward your PSLF payment tally as if you were continuing to make payments.
In this situation, it doesn’t make financial sense to keep repaying your loan during the federal forbearance period because you are still receiving PSLF credit no matter what.
You can consider redirecting the money that would normally go toward paying your federal student loans to your savings in case you do lose your job or experience a pay cut. When the economy has recovered, if you still have savings leftover, you could then consider using them to repay other forms of debt such as credit cards or private student loans.
You want to pay toward the principal on your loans
If you’re in a secure financial position and want to continue making payments on your federal student loans, your payments will go directly toward the principal of your loans until September 30, 2020. This strategy could be a smart move to lower your debt because it will minimize the total amount of your loan that you need to pay interest on when the forbearance period ends.
Be sure you’re aware of the financial risks you’re taking, however.
If you end up losing your job over the course of the pandemic and don’t have enough savings built up to get you through to your next job, you might have to rely on credit cards or personal loans to get you through. That situation could put you deeper into debt than you already are.
Assess your personal situation
There isn’t one blanket approach to student loan repayment that is right for everyone, especially during the COVID-19 pandemic. A student loan payment freeze could help you save some necessary cash. You’ll have to factor in your job security when deciding which decision is best for you.
Make sure to prioritize your current financial health so that you have enough cash on hand to help pay your living expenses. Check out additional COVID-19 resources if you need more help planning your finances during this time.
FAQs about the CARES Act and student loans
Here are answers to some of the most common questions that people are asking about repaying student loans during the coronavirus pandemic.
Will Trump forgive student loans?
Don’t mistake the forbearance granted through the CARES Act as student loan forgiveness. Though there could be changes in the future, as it currently stands, you will be required to begin making payments again on September 30, 2020. Your loan servicer will contact you in August to remind you as this date approaches.
Are all student loans suspended?
Not all student loan payments are suspended. The forbearance only applies to federal student loans. Private student loans are not covered by the CARES Act. If you have private student loans you will need to contact your servicer directly to ask if they have made any concessions or offer any payment relief due to coronavirus-related financial hardship.
How long are student loans interest-free?
Federal student loans will have a 0% interest rate until September 30, 2020.
I made a payment after the CARES Act took effect on March 27, 2020. Can I get a refund?
Yes, if you made a federal student loan payment after March 13, 2020, you can get that money refunded. Contact your loan servicer to request a refund.
If you need individual assistance with your student loans, we’re here to help — reach out to a Student Loan Planner consultant for a complimentary consultation.