The suspension of payments, known as tolerance, has provided much-needed relief for those staying between current loans or paying other bills. But for those who can afford it, it still offers the opportunity to save money or pay off student loans – without increasing interest rates.
This is because tolerance automatically applies to anyone with federal student loans and will not increase your payments during the break.
“Student loan tolerance is an opportunity for people to make progress in those areas without derailing the rest of their budget,” said Bruce McClary, senior vice president of communications for the National Federation for Credit Counseling (NFCC), said. “It’s also a good time to spend extra money on paying off high-interest credit cards or signature loans.”
Here’s how you can make the most of your finances while taking a break from your student loan.
Pay off your credit card debt
Dealing with credit card debt should be a top priority. Credit cards usually have high interest rates and can keep you from making the most of your money for things like building an emergency fund and saving for retirement.
The data from the Federal Reserve is 14.65% average interest rate on credit card.
Pair high interest rates with the minimum payment, and you can pay off your credit card for years.
Take this time to pay more than the minimum on your card balances. Doing so will allow you to tackle your debt faster and make credit available for other expenses that you may need later.
Build your emergency savings
It is never a bad idea to set up an emergency fund. Why? As we have all seen over the past year, life can be unpredictable. So it is always good to be prepared.
Emergency savings can come in handy during unexpected events, such as a car wreck or loss of job. It can also serve as a financial cushion if you make a transition during uncertain times.
If you pay a monthly student loan, you can divert the amount you would pay to your savings account to build up your emergency fund.
Mark Kantrowitz, a study loan expert, recommends doing this first before deciding whether he / she wants to continue repaying the loans during the tolerance period.
“Apart from covering unforeseen expenses for car repairs or housekeeping, it also offers you money to cover the expenses during a period of unemployment,” he said.
Try to save on living expenses for at least three to six months.
Saving for retirement
It can be difficult to save for retirement while paying off debt. But if you are interrupting your student loans, you can use this time to increase your retirement savings.
When your employer presents a 401 (k) match, you begin to maximize your contributions to achieve the full match. For example, if your business contributes up to 6% of your salary, you must contribute at least 6% to your 401 (k) to take full advantage.
“It’s free money, which’s hard to beat,” Kantrowitz said.
In any case, consider paying your student loans
The missed payments are not forgiven. Your loan total will remain the same, so will the repayment period be extended if you endure it? If you can still afford to make payments now, your loan will be paid off sooner.
“If you’re in the right place with the rest of your financial goals and commitments, you can make a lot of progress in repaying your student loans while interest does not accrue,” McClary said.
There are exceptions. For those who are enrolled in programs such as Public Service Loan Forgiveness (PSLF) or income-driven repayment plans, you should not make extra payments on your loans while enduring it. This is because additional payments can reduce the amount of forgiveness you will eventually receive.
“It might make sense to increase your retirement and investment accounts instead,” said Travis Hornsby, founder and CEO of Student Loan Planner.
But that’s not all.
Robert Farrington, founder of The College Investor, a website for personal finance and investment for Millennials, recommends that lenders on income-driven repayment plans be sure to recertify their income by September to ensure new payments reflect how much they currently have make.
“This is especially important for individuals who may have significantly reduced their income as a result of the pandemic. If you do not recertify based on your current income, you may have a loan grant that is much larger than you can afford,” he said.
On the other hand, borrowers in programs like PSLF need to make sure they certify their service to get credit for eligible work during the whole tolerance process.
Prepare to resume payments
Tolerance for student loans will not last forever, and if it ends, you must be prepared to resume payments.
“Do not lose sight of the date on which you must pay,” McClary said. “Set reminders and make sure it’s always on your radar.”
As for borrowers who may not be able to start repaying their loans for reasons such as long-term financial problems, they should explore affordable repayment options a few months before the tolerance ends.
McClary says organizations like the NFCC offer student loan repayment advice to help lenders understand which affordable repayment options best suit their circumstances and how to navigate the application process.
The conclusion
Whether you want to save for retirement, set aside money for financial emergencies or simply turn off a great interest rate, the best use of the student loan interruption can help you achieve these financial goals.
“Use this period to increase emergency savings, pay off other debts, make regular contributions to your pension and sharpen your overall finances,” Hornsby said. ‘Think of the tolerance for student loans as an opportunity to financially stick the holes in your roof the next time there is a financial storm, you are well prepared for it. ‘