While student loan payments are paused, do this with the extra money

With student loan borrowers still experiencing financial difficulties, the current freeze on federal student loan payments has been extended, granting borrowers some extra time to smooth out their household finances.

Currently, the student loan repayment extension lasts until September 30, 2021. The payment pause directly impacts student loan borrowers in the U.S. Federal Direct Loan Program and select loans in the Federal Family Education Loan Programs (i.e., loans made in the 2008-2009 and 2009-2010 academic years).

"President Biden could extend the payment pause and interest waiver further, but this seems unlikely given the current pace of vaccinations," said Mark Kantrowitz, author of the book, "How to Appeal for More College Financial Aid." "We may be well into an economic recovery by September 30, 2021."

Borrowers in the Public Service Loan Forgiveness (PSLF) program are also getting the added bonus of having 18 payment-free months count towards 120 payments required for forgiveness. That’s a good deal for borrowers.

"The less money you have to pay, the more that can be forgiven," said Joseph Orsolini, president of College Aid Planners, Inc., in Glen Ellyn, Il.

Private student loan holders do not have the benefit of their payments being paused, but they may be able to save money by taking advantage of historically low refinancing rates. Visit Credible to compare rates from multiple loan servicers at once without affecting your credit.

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What’s the best use of the repayment extension money?

With the clock ticking and no promise of more financial aid coming from Washington, D.C., federal student loan borrowers have another few months to decide what to do with their loan repayment cash. They have multiple options, financial experts say, with these household financial strategies in the "good idea" category.

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Save the money and see where you stand on September 30

Just because there is a student loan repayment moratorium, that doesn't mean not budgeting the payment. 

"The worst thing you can do is get used to spending that payment elsewhere," Orsolini said. "With the possibility of loan forgiveness on the horizon, continuing to make loan payments may not be the best idea. Instead, put the money aside in savings and wait until payments resume or for a clearer direction on loan forgiveness."

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Refinance your private student loans

For student loan borrowers who have an emergency fund and no debt aside from student loans, any refinance approach should vary depending on if the student loans are federal or private. 

"Refinancing private student loans now may allow you to take advantage of low interest rates," said Kristin Burton, founder of Strive Coaching, a financial literacy company geared to health care professionals in Indianapolis, In. "Refinancing federal student loans, on the other hand, may exclude you from programs like income-based repayment plans and Public Student Loan Forgiveness options that are only available for federal student loans."

If you do opt to refinance private loans, visit Credible to get prequalified for student loan refinancing, free of charge.

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Build an emergency fund

Putting cash aside for a rainy day fund in a savings account is a particularly popular idea with money management professionals.

"Student loan borrowers should build an emergency fund as soon as possible," said Neiko Johnson, founder of the millennial-focused personal finance blog, Secret to Finance. "Covid-19 has shown us that having an emergency fund at all times is important." 

Start that process gradually and build your fund up over time. "Aim for one-to-three months of annual income," Johnson said. "However, once all debt is paid off minus a mortgage, it’s a good approach to build a three-to-six month emergency fund."

Still not sure which path is the best for you? Visit Credible to get in touch with an experienced loan officer who can help you decide what to do with your student loans.

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Save the cash in a company retirement plan

College graduates who have been giving some short shrift to their employer retirement plans can make some hay – and some money – by refocusing on their 401(k) plans. 

"Save the money in a 401(k)," Kantrowitz said. "In particular, maximize the employer match on contributions to your retirement plan, which gives you access to free company matching funds."

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Be patient, but investment-minded, on student loan forgiveness

If you’re a student loan borrower who is waiting for word on student loan forgiveness, take a breather and build your cash reserves cautiously. 

"Consider placing your federal student loan payments in a high-yield savings account until interest resumes and more information is solidified about the potential for forgiveness of a portion of each individual’s student loans," Burton said.

You can shop around for high-yield savings accounts on Credible's online marketplace.

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