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The Department of Education recently announced the student loan interest and payment moratorium has been extended from May 1st to August 31st 2022. This announcement means millions of borrowers have several more months of not having to make payments or accrue interest on these loans. A recent poll stated that two-thirds (67%) of borrowers responding to a survey last spring said it would be difficult for them to afford payments if they resumed the following month.
The US Education Secretary called previous extensions the “final extension” to alert borrowers to get ready for the moratorium to end, but there has been a softening of the rhetoric on this topic. Borrowers are still highly encouraged to begin to get in contact with their lenders to determine what their payments will be once the moratorium ends. A time of no interest and no payments is a financial opportunity for the borrower. Here are some thoughts on what to do to put you in the best position before the relief period ends:
Survey your debts
Is your student loan debt at a lower interest rate than your car loan or credit cards? If you are not sure, then it is a good idea to put together a debt inventory listing how much you owe, the interest rate and the minimum payment. Because many have not had to make student loan payments in over a year, now is the time to determine what that obligation will be. Secondly, understanding the larger picture of your debts can help you be strategic in paying off your debt.
Review your budget
Because student loan payments have not been a part of many budgets for two years, there is a good chance those dollars are going toward other purposes. To avoid a difficult readjustment in the future, start looking at your budget with the addition of your student loan payments and begin to reclaim those dollars now.
Build an emergency fund
One of the best ways to prevent building up debt is to have cash on hand for emergencies. If you do not have $1,000 set aside for emergencies, beefing up your savings would be a great way to use some of your loan payments. Think of an emergency fund as a bodyguard for your financial journey. A fully funded emergency fund is 3-6 months of expenses, but explore these other strategies for your loan payment first before moving beyond $1,000 in savings.
Focus on high interest rate debt
If your student loans are on moratorium and they would normally be on the lower end of interest when compared to your other debt, this is an opportunity to take the funds you normally put toward your student loan debt and aggressively pay down high interest rate debt. By paying off high interest rate debt now, you are setting yourself up to have paid less interest overall and you would have accelerated your debt repayment plan. To see the difference made when focusing on high interest debt, check out our DebtBlaster calculator.
What if my student loan is normally my highest interest debt?
In the case where your normal student loan interest is the highest interest debt, make payments to your student loan now. If you just make normal payments, the loan will be paid off sooner because your entire payment will go toward the principal rather than principal and interest.
What about student loan cancellation?
One question we have received through our coaching service is whether you should hold off paying your student loans in anticipation of student loan cancellation. While there have been several recommendations for changes to student loans in general, the prospect of student loan cancellation at the time of this blog post seems to be in the early stages. If you have no other debt to focus on during this moratorium, consider saving the equivalent of your student loan payment and using that lump sum once payments resume. If a plan for loan forgiveness occurs, then you can use those savings for another goal.