Why You Can Stop Paying Student Loans Right Now
The CARES Act allows federal student loan borrowers to defer loan repayments until October 2020, and many of these loans will be set at 0% interest rates during the grace period. This is in contrast to other types of abstinence programs (eg, credit cards, mortgages) in which payments are canceled but interest continues to be charged on the outstanding debt.
If you have the option to temporarily skip student loan payments without charging additional interest, should you? If you’ve been unemployed or laid off due to the coronavirus pandemic, you might appreciate the opportunity to save a little extra money every month. But what if your income hasn’t changed? Should you also be thinking about accumulating savings – or should you focus on paying off federal student loans during that short interest-free period?
While it can be tempting to make student loan payments that go directly to the primary person, it is worth asking yourself if you might be better off saving some cash for the future. After all, we may be heading for a recession – and the income you generate today may not be enough tomorrow.
On Money.com, Betsy Mayotte (President and Founder of the Student Loan Advisor Institute ) invites federal student loan holders to consider carefully whether they really want to make payments now:
“We don’t know how long the economic impact of this pandemic will last – I certainly think after September,” Mayotte says. “I would recommend that people invest in their emergency funds to keep them as reliable as possible.”
If you already have a contingency fund, you can use the money you would have invested in your student loan payments to pay off other types of debt, such as a credit card debt that still charges interest during abstinence.
It is worth noting that not all federal student loans are eligible for an interest-free grace period right now. Quoting from the US Department of Education at StudentAid.gov :
From March 13, 2020 to September 30, 2020, the interest rate is 0% on the following types of federal student loans held by ED:
- Direct loans without default and without default
- Overdue and non-default loans under the FFEL program
- Perkins Federal Loans
Please note that some FFEL loans are owned by commercial lenders and some Perkins loans are owned by the institution you visited. These loans are currently not eligible for this benefit.
But if your federal student loans meet the 0% interest rate deferral criteria, ask yourself if you would like to use that time to pay off the principal – or the money you thought you would invest in your student loans could be better used.