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The Biden administration has extended the federal student loan payment hiatus one last time, meaning borrowers won’t owe money or accumulate interest until February 2022. While a new NerdWallet survey shows that over a third of federal student loan borrowers (35%) continued to make loan repayments throughout the automatic forbearance; others chose or had to put that money elsewhere.
With this latest extension, federal borrowers with the bulk of it covered have four to five additional payments they could apply for different purposes. If you’re not sure how to best use your remaining payment deferral, here are five suggestions, along with next steps in case you’re not ready to resume payments in February.
1. Save it in your emergency fund
According to the survey, about 1 in 8 (13%) federal student loan borrowers report having placed their loan repayment money in a savings account. The COVID-19 pandemic has been financially devastating for many, underscoring the importance of emergency savings. Ideally, you would save three to six months of expenses, but even $ 500 or $ 1,000 hidden away can make a big difference to your peace of mind and your ability to deal with the unexpected.
2. Pay off high interest debt
The survey found that some federal borrowers spent money from their potential payments on credit card debt (20%), private student loans (12%), or some other type of debt (14%) . If you’re comfortable with how much you’ve saved for emergencies, focusing on high interest debt can have a significant impact on your overall interest costs, especially with 0% federal student loans. ‘interest for the next few months.
3. Avoid High Interest Debt
Speaking of high interest debt, a $ 1,000 credit card balance with an interest rate of 16% would cost $ 160 in interest charges if held for a year. If you don’t have high-interest debt, but have upcoming purchases that you would otherwise have left on your credit card – like a home improvement project or vacation expenses – you can use the federal loan payment money to pay these fees. shopping in advance. This way, you can avoid the interest charges and stress that can accompany a high credit card balance.
4. Set it aside to pay at once
While payments aren’t due now, your top financial priority may be to pay off your federal student loans. You can make monthly payments normally or keep the money from the payment and make a large payment just before the break ends. With this approach, you have money on hand as a buffer in case something happens. If nothing changes, you can avoid the interest you would otherwise have accrued on the principal of the student loan.
5. Contribute to an IRA
According to the survey, about 1 in 6 (16%) federal student loan borrowers report having invested the money that would otherwise be used to fund their retirement loans. If you are comfortable with the amount you have in emergency savings and are not paying off high interest debt, you may choose to put the potential payment money into an IRA.
An IRA is a tax-advantaged retirement account to which a person with taxable income (or a person with a spouse with taxable income) can contribute. The current annual limit is $ 6,000, or $ 7,000 for those 50 and over. IRA contributions for 2021 can be made up to your tax filing deadline, so even the money from the January loan payment can help you increase your retirement savings and potentially help you increase your retirement savings. reduce your taxable income.
If you can’t make payments, consider the next steps
About a third of federal student loan borrowers (34%) say they use the loan payment money for necessities, like rent and food, which could indicate these expenses might not be covered otherwise. When asked when it was financially possible for them to start repaying their loan again, 11% of federal borrowers say 2022 or beyond and 10% of borrowers say they don’t know when they will be able to do so, according to the ‘investigation. .
While it’s unrealistic for you to start payments again in February, you have options to avoid defaulting on your loans. For borrowers who cannot pay the full amount owed, an income-based repayment plan might be a good option. It caps your monthly payments at a certain percentage of your discretionary income and forfeits the remaining balance after 20 or 25 years, depending on the specific payment plan you choose.
If you qualify for eligibility – for example, if you are unemployed, receiving social benefits, or undergoing cancer treatment – deferring the student loan will completely suspend your payments and may even stop earning interest (depending on the type of loan you have).
If you do not qualify for deferral, student loan forbearance is also an option. You can forbear loans for up to 12 months at a time, but you will earn interest regardless of your loan type. All of these alternatives to a standard repayment plan can cost more in interest and time over the life of a loan. But they can also provide some leeway if your budget just doesn’t allow you to pay off your student loan right now.
The article 5 options for your money before the summary of student loan payments originally appeared on NerdWallet.