Should you Pay your Federal Direct Student Loans Even if a Payment Isn’t Due?
Many of us are somewhat familiar with the CARES (Coronavirus Aid, Relief, and Economic Security) Act in response to the global pandemic and those of us that have federal direct student loans should also be aware that payments haven’t been required since March, leaving some extra cash in the pockets of Americans every month. Does the fact that student loan payments aren’t due right now mean that you shouldn’t be paying them? Or is it an opportune time to knock out that debt? Take a look at some things to consider when determining whether to keep paying those loans or to put that cash to use elsewhere.
First, lets consider which loans are actually eligible for the $0 payments in 2020. Federal Direct Loans and Federal Family Education Loans (FFEL) are the loans eligible for suspension until January 2021. The specific types of loans include Stafford, Grad Plus, Parent PLUS, Consolidation loans, FFEL loans, and Perkins Loans that are held by the U.S Department of Education. Unfortunately, loans with third-party lenders not associated with the Department of Education and any private loans do not have this protection.
So now that we know the types of loans that are eligible, should you be continuing to pay them down, even if payments aren’t due and the “$0 payments” will count towards Public Service Loan Forgiveness (PSLF)? That question isn’t so simple and as with almost any financial matter; it depends. Here are some things to consider:
1) Do you need the cash that was going towards your student loans?
The reason these loan payments were suspended as part of the CARES Act was literally to help people with financial hardship due to COVID-19. If you lost your job, have been furloughed, or think there is a possibility you will lose your job then you should consider socking that money away into a savings account. You won’t want to be stretched too thin and not have cash available should you need it so absolutely take advantage of not paying that loan if you need the cash for savings or basic needs. This does not mean to spend the money or to see it as a raise. You should be thoughtful when deciding the best place for those dollars to go to support you through these times.
2) Do you have any other higher interest debt?
If you aren’t a position to lose your job and already have a nice chunk of change in your savings (recommendations are usually 3-6 months of non-discretionary expenses), then you should look at the interest you’re paying on other debt. If you have credit cards that just aren’t getting paid off every month, those are likely running you between 16%-29% APR! That’s an expensive burden to bear so if you have extra money that was allocated to student loans and are no longer required in 2020, pay off the higher debt rather than the 0% interest you currently have on those student loans. Do everything you possibly can to relieve yourself of any revolving high interest debt.
You can also consider paying non-credit card debt such as car loans or personal loans but keep in mind that if your interest rate is already extremely low on those loans, it may make sense to do something else with those dollars like increase employer retirement plan contributions or IRA contributions or to continue padding your savings.
3) Will you be able to take advantage of PSLF or will you end up paying your whole student loan balance?
Another consideration is whether you plan to take advantage of PSLF or if you make enough income and your loan balance is low enough that you’ll end up paying the entire balance. If you plan to take advantage of PSLF, it likely does not make sense to make any payments because your strategy becomes paying as little as possible until you can be relieved of your debt. You’re essentially throwing money away at something that isn’t necessary. However, if you plan to pay down your entire loan (usually for higher income earners that don’t have loans in the 6 figures and wouldn’t have jobs that qualify for PSLF), this could be an opportune time to make a dent in some of the principle and not have to pay anything towards the interest.
These are just a few of the many things to consider when deciding whether to make payments or take advantage of the suspension. Some other things to keep in mind may also be your personal risk comfort and the opportunity to invest that money somewhere instead of paying on a 0% loan or maybe there are other priorities in your life you need to be cognizant of like buying a home or having a child. As with anything, always consult your financial planner when making these decisions so you can truly weigh your options and make the optimal choice for you and your family.