5 smart things to do for anyone with forborne federal student loans


Federal student loan forbearance has been extended until at least the end of January 2021, with interest rates remaining at 0% and no payments due.

While it was due to expire at the end of 2020, the abstention was extended until at least January 31, 2021, according to an announcement made by Education Sec. Betsy DeVos. While student loans held by the federal government will not have any payments owed or accrued interest, private student loans do not have this protection. Borrowers with private student loans will need to continue paying normally or contact the lender.

For many people with suspended student loans, paying directly on student loans while interest is suspended is not the right decision. Two financial planners told Business Insider that certain financial priorities should be prioritized.

1. Cover your immediate needs and keep cash on hand

If you’re currently out of work, a financial planner says you shouldn’t feel bad about using that money for your immediate expenses.

“I think people feel a lot guilty about the debt they have, and now is not the time to be guilty about it,” says the financial planner. Samantha Gorelick from Brunch and Budget. Working with her clients, she says, “We have put a lot of emphasis on paying down debt and more emphasis on savings. Once you’ve paid off that debt, the money is gone.

Financial planner Cait Howerton of Smartpath echoes this sentiment. “For those who don’t have a job or are on leave, money is king,” she says. Keeping cash on hand could help avoid having to incur high interest debt, like credit card debt, to stay afloat.

2. Build an emergency fund

An emergency fund is a savings account that could help cover your expenses if you lose your job or face an unforeseen emergency. And have an emergency fund is more important than ever.

“If you don’t have an emergency fund of at least three months, you have to worry about it,” Howerton explains. The pandemic has proven how critical these accounts are, and your new free money could help you set one up.

Start your emergency fund by calculating all of your monthly essentials, and multiply that amount by the number of months you want to achieve. Some people choose to save more than three months of expenses. Howerton says some people should save more.

“If you have dependents or are expecting children, you might even want to increase that number,” she says. If you work in an unstable industry, such as retail or restaurant business, or if it’s hard to find a job, saving can give you extra peace of mind.

Save your emergency fund in a liquid account that helps the account grow over time – ideally in a high yield savings account. Keeping it out of sight of where you usually manage your finances might also help you avoid spending it.

3. Pay off high interest debt

If you have credit card debt, forbearance might be an opportunity to get it under control. “Stop paying student loans and reduce some of this debt with high interest rates,” Howerton said. the the average credit card has an interest rate by about 15%, which will quickly increase interest and your total debt.

If you already have an emergency fund and are able to devote your extra money to pay off the debt, any high interest rate debt should take priority over student debt. With student loan interest rates at 0% during the pandemic, paying off debts that still have high interest rates could help you save more.

4. Only consider paying off your student loan principal if you’ve taken care of everything else.

Continue to repay your student loans You should only be concerned if you’re out of high-interest debt, have a full emergency fund, and expect your income to be stable.

“If you have no trouble [high-interest] debt, you can start accelerating your student loan repayment now without any interest accruing, “Howerton says.” Now is a great time to really take advantage of the principal. ”

With an interest rate of 0%, all the money you invest in your loans will go directly to the amount you owe and the amount that interest is calculated on.

5. If you want to play it safe with loan repayment, save money until the forbearance ends.

If you want repay your student loans but you want to keep an extra cushion, Gorelick says you don’t have to make the decision now. Instead, she suggests to save money you would have taken out loans and waited for the end of the abstention and the pandemic to take a step.

“I’ve told people with federal loans that are currently on hold to save each month, if they can afford it, what they would normally pay for their student loans,” Gorelick said. “Before loans fall due, people can decide whether they are able to put extra money into their loans or keep that money in their savings,” she says.

Keeping cash on hand can give you the flexibility of having both cash on hand during turbulence and the ability to pay extra for your student loans when the going gets better.

Editor’s Note: This post has been updated to reflect the fact that federal student loan forbearance has been extended until January 2021, according to a statement by Education Sec. Betsy DeVos on Friday December 4th. Previously, it was scheduled to expire on December 31, 2020.

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