Student loan savings - what to do with your money with payments paused

Americans possess more than $1.7 trillion in outstanding student loan debt. The coronavirus pandemic immediately impacted many of these borrowers’ ability to pay their monthly loan debts, and in response, the Trump administration placed a temporary freeze on all federal student loan payments. The Biden administration has since extended this freeze to at least October 2021, leaving many borrowers with a little extra cash on hand.

The freeze is not extended to private student loans, however, so the distinction between a federal loan and a private student loan is an important one.

If you’re not paying your federal student loans right now, you may be wondering how you should spend this extra money. Should you continue paying for college anyway? Maybe you're thinking of putting it into a bank account or brokerage account or real estate. While it’s tempting to use the money for immediate expenses, there are other responsible ways that you can use these funds to better preserve your financial future. Consider the extra money like an income tax return windfall. What are your financial goals and can the extra money be used smartly to achieve them?

Four strategic ways that borrowers can manage these spare funds while the repayment freeze continues include:

1. Put savings into a high-yield savings account
2. Consider a balance transfer credit card to manage any existing credit card debt
3. Invest in a retirement strategy
4. Consider the benefits of a CD

1. Put savings into a high-yield savings account

Instead of placing your extra cash in your normal savings account, you can potentially earn more interest by placing these funds into a high-yield savings account. High-yield savings accounts are FDIC insured, rarely have service fees, and allow you to access your savings on a limited basis. Most importantly, high-yield savings accounts have variable interest rates which are typically higher than interest rates offered through traditional savings accounts. Depending on the market, interest rates for a high-yield savings account can be more than twice as high. You can save money via the freeze on payments and make money by using a high-yield savings bank account.

2. Consider a balance transfer credit card to manage any existing credit card debt

Instead of saving these funds, you can reroute your monthly student loan repayment amounts to pay off existing credit card debt. Many credit cards carry high-interest rates which can unnecessarily increase the overall amount that you owe. One way you can pay off debt faster is by transferring your existing credit card debt to a single credit card with a lower interest rate. With a lower interest rate, the extra money you use to pay down the balance can instantly lower your monthly payments and raise your credit score. This will also help toward boosting your profile from a fair credit rating to an excellent credit range.

3. Invest in a retirement strategy

Your student loans were an investment in your professional future, but are you also investing in your post-career future? What do you have saved for retirement? It's never too early to start retirement planning. The money you’re not putting towards loan repayment now could be dedicated to your retirement fund via a 401(k) or IRA. A 401(k) is an employer-sponsored plan which means they’ll match your contributions up to a certain amount. Instead of saving your loan repayment funds in a traditional savings account, you could redirect a percentage of your paycheck to your 401(k) account.

Alternatively, you could open up an IRA account which is an individual-sponsored retirement plan. The main difference between a traditional IRA account and a Roth IRA account is how the funds are taxed. Traditional IRA contributions are taxed upon withdrawal; Roth IRA contributions are taxed upon deposit.

4. Consider the benefits of a CD

If you’re not interested in opening a high-yield savings account, you may want to consider a certificate of deposit. A CD is a one-time lump sum payment that typically grows at a higher APY than a traditional savings account. It is FDIC insured and the interest rate is fixed at the time of deposit. The one drawback is that your deposit cannot be withdrawn until the pre-arranged maturity date, which could be as short as six months or as long as five years. A CD is a low-risk investment option that offers a guaranteed rate of return and may be a wise choice if you can afford to leave the amount untouched for a set period of time.

Overall, student loan debt can add up, and paying for college can be tiresome and expensive. The current freeze on federal student loan repayments presents a unique opportunity for borrowers to increase their savings or reduce their other debts.

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