As a result of the COVID-19 pandemic, the automatic federal student loan forbearance put in place by the CARES Act in March 2020 has been extended until at least August 31, 2022. During this time, the federal government has suspended payments, interest accumulation, and collection activities for student loan balances. The good news is that you can essentially miss your regular payment on most federal student loans with no penalty.
There are some other smart money moves you can choose to make instead of making federal student loan payments. Remember, there is no interest accruing on your federal student loans. You can put your money towards other financial priorities. Take advantage of this forbearance period to create a plan to address your loans once forbearance ends.
If you are not paying your federal student loans right now, you may decide to focus on any private student loans that you may have. As private student loans are not included in the administrative forbearance that started back in March of 2020 - meaning the interest accumulation has not been suspended - it may be wise to increase your private student loan payments to help eliminate this debt more quickly.
It can be easy to accumulate other high-interest debt while in school or training, and those balances may prevent you from making other financial moves.
For example, if you have credit card debt with a 10 percent interest rate or more, it may be better to direct your "extra funds" during the forbearance. This holds true for personal or auto loans with higher interest rates. It is typically a good idea to focus on paying down your debt with higher interest rates. By eliminating as much of your debt as you can, you may have more breathing room in your budget.
It is not every day that you have the opportunity to skip your student loan payment. This period is a great time to build an emergency fund, which is savings you put aside for unplanned or unforeseen expenses. Ideally, you want to save between three to six months' worth of basic monthly expenses, including rent or mortgage, groceries, transportation, utilities, bills, childcare, and other costs.
If saving three to six months of expenses seems daunting, even saving $500 or $1,000 can be helpful to avoid falling behind on unexpected bills and debt payments. Now is a great time to start while your federal student loan payments are on pause because of forbearance. You may want to earmark part of your expected student loan payment and put it toward emergency savings.
Remember, an emergency fund helps you avoid racking up credit card debt when an unanticipated expense occurs.
Not having to pay your federal student loan payments also allows you to save for a specific goal. So think about it and write down what is most important to you and when you want to achieve it.
For instance, setting aside a portion of your student loan payment savings for a new car, down payment for a home, traveling to see family or friends, or a home renovation can be a good use of those funds.
If you are in the position where you have paid down your high-interest debt and have a solid emergency fund, then you may want to think about using some of your student loan payment funds for retirement. We all know the importance of saving for retirement and that it should be a long-term goal.
A common practice is to allocate a designated percentage of your income towards a retirement account. Of course, if you can contribute more – all the better, and if you can max out your contributions – that is the ultimate goal.
The global pandemic has changed the entire landscape of student loan repayment and refinance. If you have questions about your student loans, the forbearance period for federal student loans, or what you can do to prepare for forbearance to end, please reach out and connect with our financial planners to discuss your specific situation.
(Updated: July 2022)
Will Koster is a financial planner with Spaugh Dameron Tenny. The experience of losing his father as a teenager helped Will find his calling in financial planning. He has a passion for working with dentists and physicians, helping them navigate their unique wealth creation journeys. In addition, Will has become the in-house expert on student loans after completing the Certified Student Loan Professional® training.
For over 50 years, Spaugh Dameron Tenny has provided comprehensive financial planning for physicians and dentists across the U.S. In addition to providing personalized advice, we walk our clients through their options to help maximize finances and maintain financial security.
Securities, investment advisory and financial planning services offered through qualified Registered Representatives of MML Investors Services, LLC. Member SIPC. Supervisory office: 4350 Congress Street, Suite 300, Charlotte, NC 28209, (704) 557-9600. Spaugh Dameron Tenny is not a subsidiary or affiliate of MML Investors Services, LLC or its affiliated companies.→ Check the background of your financial professional on FINRA'S Broker check