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Paying Student Loans During COVID-19
There have been many questions regarding paying off student loans during the COVID-19 pandemic. As someone who has been finishing off paying $70,000 in student debt, I have been caught in the middle of the confusion regarding student loan forbearance and paying off student loans.
The biggest question I have encountered has been if you should pay off your student loans during the COVID-19 forbearance or wait until interest begins again.
In short, it is best practice to pay off as much of your interest and principal during the COVID-19 student loan forbearance.
In this article I will discuss what a student loan forbearance is, if you should pay off your interest or principle in 2021, how to budget for paying off your student loans, and 8 unique hacks to pay off your student loans faster!
What is Student Loan Forbearance?
The term forbearance means that you don’t have to make a payment.
In 2020 The United States government enacted an administrative forbearance, making it so monthly student loan payments were temporarily suspended. Additionally, this forbearance includes a pause on interest, making it so your student loans are not racking up interest as they previously would have been.
As of the time of this article, the federal student loan forbearance has been extended through September 30th of 2021.
It is important to note that this student loan forbearance only is relating to federal student loans. Federal loans are loans that are not private and not provided by the government.
Should I Pay Off My Interest During Forbearance?
Many student loan borrowers find that a significant chunk of their student loan debt is interest.
Interest on your student loans is money that accumulates on a regular basis. Graduate loans are typically higher than undergraduate student loans, and interest rates can range anywhere from 3% to 8%.
When considering that there is a pause on interest accumulation and a pause on a requirement for paying off your monthly student loans, this makes it very convincing to not make payments until the end of the forbearance.
Question is, should you pay off your interest during the COVID-19 forbearance?
A large consideration to make is to think about how soon you want to pay off your student loans. Are you on a debt free journey or trying to achieve financial freedom? What are your long term financial goals?
For anyone considering paying off their student debt early, the federal student loan forbearance is an amazing opportunity to get ahead of your interest payments and to pay off your student loans quickly!
Imagine all the interest that could accumulate between March of 2020 through September of 2021. Depending on how much money you have taken out in student loans, and your rate of interest, this could be many thousands of dollars!
When paying off student loans, paying interest first is typically recommended. It is important to consider that paying off interest does not change your principal loan amount. However, this forbearance opportunity may be a perfect time to pay off interest in order to finally start paying down your principal amount.
Can I Make Principal Payments During a Forbearance?
The largest benefit of paying off student loans during the federal student loan forbearance is the opportunity to pay down your student loan principal without continuously paying off an accruing interest amount.
This is an opportunity unlike any other! That is, if you have a strategic plan in place. The student loan forbearance in 2021 is an opportune time to reduce your principal amount so that when the forbearance ends, your automatic interest that begins to accrue again will be less than before.
Having a payment that is potentially a couple hundred dollars less per month could be life changing for families. Having more money to put towards savings, investing, or even toward your other debt can get you much closer to your financial goals!
What if I Don’t Make Any Student Loan Payments During the Forbearance?
There are both pros and cons to making student loan payments during the COVID-19 forbearance:
- Pros
The purpose behind the federal student loan forbearance was to allow Americans to have more money each month in order to keep the economy going and to keep families financially safe during the pandemic. By having an extra couple hundred or thousands of dollars each month, this money can go toward housing, utility, transportation, and living expenses.
Additionally, not having to make these large payments could make a drastic impact on debt payoff and overall building up savings.
- Cons
One significant negative that comes with not paying your student loans during the COVID-19 forbearance is the issue of not budgeting for your student loans once the forbearance is over.
If you become used to having more money each month, over the series of a year and a half of this forbearance, you will have built new habits and adjusted to a new lifestyle with this money.
Adjusting back to paying all of this money toward your student loans each month again may be very difficult depending on your minimum payment requirement.
This reason is why so many financial gurus and bloggers are advocating for paying off student loans during this forbearance, rather than waiting for it to be over.
Therefore, even if it is just $50 a month, the average monthly minimum payment, maintaining the habit of paying off the loans each month is more significant than trying to rebuild a habit of paying the student loans after the forbearance is over!
Start a Student Loans Monthly Budget
If you are considering paying off your interest or your student loans principal during the COVID-19 forbearance, it is highly recommended to consider a student loans monthly budget.
This type of monthly budget is really no different than any other monthly budget! The key, though, is to focus on student loan payoff.
There are many dead payoff strategies, from the snowball method to the avalanche method and a handful of other creative methodologies that financial bloggers have come up with over the years. Not one method is particularly better than the other, and they all have the same end goal.
The easiest way to have a monthly budget for your student loans is to create a zero based budget.
A zero based budget is where you look at all of your expenses and all of your income for the month and specifically place each dollar into a category. These categories can include anything from food to utilities to gas and transportation, and even toward birthday gifts.
I suggest downloading a free budgeting app like EveryDollar or Personal Capital in order to set up a budget!
Once you have examined all of your income and expenses, and predicted how much you would spend in the upcoming month, the key for a student loans focused monthly budget is to figure out how to get extra money in your “student loans” debt payoff category!
PRO TIP: Try to save more rather than earn more. When you try to earn more money, you need to realize that you can be taxed on that money compared to not losing out on money when you save more.
Be sure to check out the following articles so you can maximize your student loan debt payoff during the 2021 forbearance period!
- 3 Budget Hacks That No One Wants to Tell You
- Pro Tips to Using Envelopes to Save Thousands Each Year
8 Frugal Hacks to Paying Off Student Loans
In order to expedite your efforts toward student loan payoff, consider the following 10 frugal budget hacks to pay off your student debt!
1. Maximize Your Free Time
Do you have unique skills or interest in starting a side hustle? Take advantage of your working at home and your free time by providing services on a website like fiber or beginning a side hustle. It can be as easy as mowing lawns, cleaning gutters, painting old furniture, selling garage sale items on eBay, or starting a YouTube channel. Get creative!
2. House Hack
As a rental investor myself, I always need to get a rental investing plug into each article! House hacking is truly the easiest way to significantly reduce your mortgage payment and have hundreds of dollars more each month to put towards your student loans. Anyone can do it and it can be free! I highly recommend you check out the popular book The House Hacking Strategy for a thorough guide of how to do this!
3. Quit All Your Subscriptions
Subscription services are eating up all of your monthly savings! This can range anywhere from music to your pet toy boxes to your cable and your food subscription services. If you are someone who belongs to multiple subscription services, you could save a significant amount of money each month by quitting these services and using the money to pay off your loans!
4. Change Your Money Mindset
During the COVID-19 forbearance you have a once in a lifetime opportunity to pay off your loans faster than you ever could before. Get ahead of your peers by changing your money mindset. What this means is that you should build a new relationship with money. Cut back on expenses and try using cash in order to feel the pain of losing money. It will help you too experience the need for paying off your student loans.
5. Start an Emergency Fund
If you do not already have an emergency fund then I it is highly recommended to begin when as soon as possible. This budget principle is one that is taught in countless financial books, blogs, and courses. An emergency fund’s money set aside specifically for emergencies. Most people recommend having at least $1000 setting aside in a fund but many people recommend up to six months of you are expenses set away in an account.
The reason this is so important regarding paying off your student loans is because over the following months, any emergency can happen and it is far easier to hey with an emergency fund then try to get yourself into more debt.
6. Start a Money Challenge
Money challenges are popular because they help with habit forming and are typically fun for the whole family to engage in! There are so many money challenges out there, and they all range in complexity and duration. Below I have listed a handful of money challenges to consider in order to save up extra money this year!
- Maximize Your Savings with the No Spend Challenge
- Your Next Favorite Savings Challenge: The Grandma Money Challenge
- Save Over $5,000 in a Year with Envelopes!
- The Nickel Challenge: Easiest Path to Saving Money
7. Meal Prepping
Aside from mortgage payments, the food category of the average American’s monthly budget is typically one of the highest numbers. In order to reduce you’re spending in this budget category and reallocate the money toward student loan payoff, consider meal prepping! Meal prepping is an easy way to reduce eating out and it clear for ate healthier eating into your lifestyle as well. Pinterest has countless resources and articles that can guide you too meal prepping and eating more at home!
8. Unsubscribe from Emails
One of my favorite budget hacks is to unfollow stores and shops on social media, and to unsubscribe from marketing emails! the purpose of all the emails your favorite stores send and the reason for all of their social media posts is to get you to buy more. By unfollowing and unsubscribing you will reduce your exposure to marketing attempts and therefore spend less in the long run
Summary
If you have the funds, take advantage of the unique opportunity to pay off interest and some of your principal amount during the COVID-19 forbearance!
This is your chance to finally get ahead with your student loan payments! Many of your peers may consider this time as an opportunity to reallocate the money toward leisure or other expenses. You also do not want to get into a new habit and routine of not paying your student loan payments. This could cause a financial difficulty for when the federal student loan payments become required again.