Federal student loan payments have been paused since March 2020. As of August 6, that pause has been extended “one final time” through January 31, 2022. What this means is that Federal student loan payments will not be required until February 2022 and that interest on these loans will not accrue during that time.
The student loan payment pause was put into place to help those whose financial lives have been negatively affected by the COVID-19 pandemic and its effects on the economy. While I think this has probably served as a great benefit for some throughout the past year and a half, I fear that it could end up being an unintended burden on some people as well.
Some People Have Gotten Used to Spending Their Student Loan Payments
Some people who have not been negatively affected financially by the pandemic have taken advantage of the student loan payment pause. However, if they’ve not been intentional about using the extra funds to strengthen their financial situation, they’ve probably gotten used to spending the money. This means that some people may have become accustomed to living a lifestyle that they won’t be able to sustain once payments start back up in February.
What happens to those who have been spending the money that otherwise would have gone to student loan payments when payments start back up? Will they be able to cut their spending to accommodate? Will they go into credit card debt to maintain the lifestyle they’ve gotten used to?
Better Options for Paused Student Loan Payment Funds
If you’re fortunate enough to be in a position where suspended student loan payments are a luxury rather than a necessity, then I think that you need a plan in place for what you’re going to do with the extra funds over the next 5 months. This is an opportunity to make your finances better.
Emergency Fund & Debt Pay Down
As I’ve written about before, two of the best places to start when considering how to make your personal finances better are to establish or increase your emergency fund and to work on your debt pay down strategy, specifically focusing on paying down high interest debt such as credit cards.
Cash On Hand
Another option would be to save the payments that you would otherwise be making towards student loans. This could act as a bolster to your emergency fund in the short-term (or in the long run if you need it to), but could also allow you to have a lump sum payment available once student loan payments come due in February 2022.
Keeping the money in a high yield savings account isn’t going to generate much of a return, but will be much safer than investing the funds in financial securities such as stocks, bonds, or cryptocurrencies. However, there are other benefits to keeping this cash on hand in addition to those mentioned above.
Having cash on hand “just in case is” often a good idea. It feels like the world is going through an uncertain time and having funds available to do something with if you needed to could help out in a pinch.
If you end up not needing the money, then you can decide closer to February whether you want to make a lump sum payment towards your student loans, keep it in cash as part of your emergency fund, or even spend it on something that will make you happy if it’s appropriate for your financial situation.
And in the off chance that some portion of student loans are forgiven under the Biden Administration (it seems like talk about this was hot and heavy earlier this year and has died off), I’ll bet that you’ll be happy with your strategy. (Don’t get your hopes up that this will happen.)
Set Your Strategy
Rather than just getting used to spending extra money because student loan payments are paused, I encourage you to create a strategy that will put you in a better financial position. Use this time of flexibility provided by Federal student loan payment forbearance to get ahead and to give yourself a financial boost.
