Who would have thought that only a few months into 2020 we’d be talking about a wide-reaching student loan forbearance by the US government brought on by a global pandemic? Seems like a stretch to me, but here we are. Fortunately, instead of tanking us deeper into student loan debt, this provision of the CARES Act has given us a passageway into the wonders of student loan forbearance!
What exactly is federal student loan forbearance anyway? It means that, depending on the type of loan you have, you won’t be charged interest on the federal student loans you have outstanding, and your student loan payments will be automatically suspended. This forbearance will continue for six months, beginning March 13, 2020 through September 30, 2020.
Update! Forebearance was extended through December 31, 2020!
So, no interest or payments on your loans for six months? That sounds like a financial opportunity. The question is: how do you make it work for you?
Step 1: Make sure your loans qualify, and you are receiving the benefits of student loan forbearance that was promised to you.
Specifically, make sure that your loans have reset to a 0% interest rate, and you are having no automatic payments taken from your account. Log into your account and see if this is happening. If it still is, you’ll need to call your loan provider. Right now, wait times are extremely high, but be persistent. Certain types of loans don’t qualify, namely private student loans. Read more here. There have also been reports of some borrower’s credit scores being negatively impacted. That should not be the case, so check on that too.
Step 2: Pause! Be intentional about what you do with the extra cash in your pocket each month.
For many people, an extra six months of no student loan repayments can be a huge windfall of cash. Depending on the size of your student loans, this forbearance might be putting anywhere from an extra $500 to $10,000+ in your pocket. So it’s worth paying attention to. Don’t just let it sit there! Deciding what to do with the extra cash depends on, as always, your situation and financial goals.
Step 3: Figure out what your options are.
If you’re feeling uncertain about your income picture for you or your family, the first thing to do is consider automating this extra cash out of your checking account and into savings. Be intentional about saving this money and building your reserves, especially since we’re in the beginnings of a recession. As a rule of thumb, you should have an emergency fund that will cover three to six months of expenses. So if you don’t, now’s the time to stash that cash away. Just be aware that automatic payments for your student loans will resume by October 1st.
If you are feeling more comfortable with your income picture, or feel you have plenty of savings to last you even with a change to your income, a few other strategies are worth considering:
- Get rid of your loan sooner rather than later: If your goal is to get rid of the loans as quick as possible, using this six month period to make payments while interest is not accruing will mean you make progress on paying down your balances faster. Now, just because you can start paying doesn’t mean you have to or should do it immediately. You can take advantage of the forbearance, and funnel your cash into a high yield savings account for the next few months, then use that money to pay a lump sum toward the end of the term. All this sounds great, but remember: do the math first to see if making payments will really save you money! Afterward, you may consider changing your income driven repayment plan (to lower your monthly payment going forward), or to refinance your loans together later on. Again, this all depends on your larger financial goals.
- Optimize the money by looking at your total debts: Do you have other higher cost debt payments that you would prefer to pay down faster? Or a smaller debt that will open up a lot of extra cash each month if it’s paid off sooner? Take a look at the big picture of your debt and see what, if any, other debts exist. Look at what your interest rates are across the board; the loan with the highest rate is usually the one you want to tackle first. It may make sense to redirect this cash toward those loans instead. This helps you to shorten the time it takes you to pay off other debts.
- Don’t pay if you’re on a Forgiveness Plan: If you are on a forgiveness program like PSLF, there is really no benefit to continuing to pay down your debts during forbearance. Instead, focus on building your cash savings, or, better yet, focus on how you could lower your future payments. For example, if you redirect some of that cash into a 401k, your income could decrease for future tax calculations. That gives you a double benefit. Not only would this help reduce this year’s income on your tax return, but it would also mean that when your income is recertified for your student loan, your payments go down. This further optimizes how much you have to pay over the total life of your loan forgiveness. That’s the type of domino effect you could get used to.
Whatever your options, I would first encourage you to think about letting the cash build first. At this point, there’s no need to rush into any type of strategy; instead, you should take the time to figure out your next steps. This is where feeling like we’re in limbo comes in handy! It gives you some time to plan carefully. Hopefully by then, you’ll have a little more clarity and confidence in using that extra cash that’s come your way.
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Jim is a financial advisor and owner of Thinking Big Financial, Inc. Thinking Big Financial is a fee-only registered investment advisor offering financial planning and investment management services. Specializing in working with the LGBTQ Community.
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