If you’re thinking of paying off some federal student loans in the New Year, you might want to wait. There may be better uses for your money.
Federal student loan borrowers recently received welcome news that they could suspend their monthly payments until February 1, 2021. The Forbearance is part of a program that began this summer under the CARES Act.
The latest announcement gives many graduates an extra month of financial relief.
But even assuming the loans will be due again in early 2021, I don’t recommend working particularly hard this year to pay off your government loans. Pay the minimum amounts as needed, but not a cent more.
This is not the traditional advice we are used to hearing. Debt is a four letter word after all. Why postpone getting debt free when you can help?
Well, at this strange moment in history, I think there are better strategies for our money – like building an emergency savings fund – than aggressively paying off federal student loans.
For one thing, the pandemic is far from over and more than 12 million Americans are currently unemployed. So I would not be surprised if further debt relief were made in a third round of the economy. And I would fully support driving this train.
Federal loan payments are currently deferred until January 31, 2020. Until then, you owe neither principal nor interest.
President-elect Joe Biden has vowed to urgently change the debt debacle with student loans topping more than $ 1.6 trillion. For those who have already dropped out of school and are in debt, the new administration’s plan provides for those who choose to work in the public sector to have more loans waived and the existing income-based repayment plan (a provision from the Obama Era) even more affordable by reducing monthly payments by more than 50%.
If you only have a few thousand dollars left on your Stafford loan, well, ok. Pay it off. There is something to be said when you go to bed at night knowing that you are debt free. But again, only do so if it is a small amount and you can easily afford it.
And if your student loan is kept private, these rules don’t apply. You might consider refinancing to lower your monthly payments, or ask your provider for indulgence.
But when you have tens of thousands or more in federal student loan debt and other financial gaps to fill – like paying back credit card debt with higher interest rates, adding to your savings, or contributing to your retirement plan – the money is smart, I say to focus on these areas first.
You are sure to get more for your money here.