Why You Shouldn’t Make Monthly Payments on a Suspended Student Loan (Even If You Can)
If you live on student loans, you’ve probably been paying close attention to our government ‘s ongoing debate about enacting government student loan forgiveness – $ 50,000, $ 10,000, or nothing at all. Context is familiar: the average American debt for student loans is around 30 thousand dollars , and the repayment crisis loomed before the pandemic COVID-19 sent many young Americans in financial tailspin . Right now, interest on federal student loans has been suspended until September 30 due to the pandemic. Should I continue to make regular federal loan payments to reduce my principal? If you have no cash, the answer is no.
Interest matters
Having serious student debt often means familiarizing yourself with popular advice on repayment options. My own opening balance of about $ 115,000 meant I went through all the options, from forgiving a government service loan to bankruptcy , to figure out what would happen if I just left the country and never returned . I went through every stage of grief until I finally settled on an aggressive repayment plan based on paying principal whenever possible, but I haven’t paid a dollar since CARES suspended interest payments on a federal student loan in March. 2020 because there is no benefit in making recurring payments when no interest is charged on me.
The key word here is “normal”. Recurring payments means a decrease in your principal, which ultimately reduces the total amount you have to pay by reducing the amount of interest. This is a great goal for those of us in debt, but it only depends on the time when interest is actively charged. Although the interest rate is suspended several months in advance, there is no difference between the effect of regular monthly payments and the effect of skipping them altogether, placing that money in a preferred savings account, and paying a lump sum just before the continuation of interest payments is scheduled. People who can afford it would be better off paying their student loan payments the day before interest payments resume , rather than paying the same amount through regular monthly installments.
What Popular Financial Advice Wrong
It may sound like a minor nuance, but it is an important nuance that challenges popular financial advice that is often shared by people who may not know what it is like to struggle financially in this context, if at all. The problem with recurring monthly payments is that we are still a pandemic, and this suggests future stability at a time when the floor may still fall, leaving us potentially wishing that those thousands were already paid. He underestimates the “nest egg” that you could build for two purposes: in times of trouble, you can rely on what you saved, and if your finances remain stable, you can pay that lump sum before the interest period resumes, rather than a moment earlier.
None of us know when we are going to face the financial turmoil of a pandemic or not, and that scares them – unexpected job losses, medical bills or funeral expenses can undermine your finances at any time. The end of the payment of student loans and interest should not be seen solely as a benefit to those actively drowning in an avalanche, but also as an opportunity for those one step ahead of it to get some distance from the snow that is overtaking us.
Make the nest egg bigger instead.
While you are not charged interest, there is no benefit in the recurring payments and egg confiscation you might need in case you start to lose financial position. Instead, consider saving that money, if possible, by making a very big safety net for yourself. Then, if you don’t need it, you can pay the large lump sum on September 29th or any other day that interest eventually resumes. This is one small step you can take to find peace of mind during difficult times.