Should you defer your federal student loans during coronavirus forbearance?

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Borrowers with federal student loans received some welcome relief from their debts earlier this year. The Department of Education suspended loan payments, collections and interest charges on most federal student loans through the end of 2020. Borrowers do not have to apply for this forbearance, as it has been set up to automatically apply to eligible federal student loans. But while payment deferral is automatic, some borrowers may benefit from continued payments through the end of the year.

Deferring loan payments gives borrowers flexibility in other areas

What are the benefits of skipping loan payments through the end of the year? According to financial adviser Justin Nabity, who also runs Physicians Thrive, the biggest benefit most borrowers will get is a break from dealing with their loans. With the coronavirus causing job layoffs and high unemployment, Nabity says that deferment can allow cash-strapped borrowers to put funds toward more critical expenses.

Having several months to skip federal student loan payments could help borrowers get in better financial shape overall. Instead of paying student loans, individuals could move the amount of their payments into a high-yield savings account. They could also spend this time paying off any high-interest debt they have, including credit card debt.

Who should defer their student loans?

Borrowers who will most benefit from this period of administrative forbearance include:

  • Individuals experiencing financial hardship.
  • Anyone with credit card debt or other high-interest bills they could pay off.
  • Borrowers able to funnel loan payments into a high-yield savings account.

Choosing to make payments could help borrowers pay off loans faster

If your income has dropped dramatically or you’re unemployed and looking for work, it absolutely makes sense to skip loan payments on eligible loans through the end of the year. If you can afford to continue making loan payments, however, your decision isn’t so cut and dried.

For starters, you could be missing out on a huge opportunity if you skip loan payments just because you can. Nabity says that having your loans set at 0 percent interest means that every dollar you pay toward your student loan will go to the principal. As a result of continuing with payments, your loan repayment timeline will shorten and you’ll save money on interest over time.

Keep in mind that skipping loan payments during forbearance also only puts off the inevitable. When the forbearance period ends, you’ll pick up exactly where you were in terms of your repayment timeline.

Who should not defer their student loans?

There are plenty of situations where it does not make sense to defer student loans. Individuals who should continue making payments on their student loans include the following:

  • People who haven’t lost income due to the pandemic.
  • Anyone who wants to pay off their loans as quickly as possible.
  • Borrowers with a large balance that will take a long time to pay off.

Additional considerations for borrowers on specialized repayment plans

What about borrowers working toward Public Service Loan Forgiveness (PSLF) or on an income-driven repayment plan? With PSLF, experts agree you should plan on skipping student loan payments until the end of December. According to the U.S. Department of Education, your skipped months will still count toward the 120 on-time payments you need to qualify.

If you’re on an income-driven repayment plan like Pay As You Earn (PAYE) or Income-Based Repayment (IBR), you should also skip payments and utilize the forbearance; all suspended payments will still count toward forgiveness at the end of your income-driven repayment plan.

Also note that loans in default that are in the midst of a rehabilitation agreement will still qualify for the federal forbearance period. If your loans are in default and you are not currently trying to rehabilitate them, you still qualify for a break, since the new order also stops collections activity.

The bottom line

If you decide to continue making payments throughout the forbearance period, you should try to be as strategic as you can. For example, Mark Kantrowitz of Savingforcollege.com says that you should target extra payments to the loan with the highest interest rate. “This might not be a federal student loan, but a private student loan,” he says. Either way, paying more toward the loan with the highest interest rate will help you maximize your impact.

Robert Farrington of The College Investor suggests that if you want to make extra principal payments, you should wait until just before the forbearance ends. “No reason to give the government any extra money! Just put it in a savings account and earn 1 percent for yourself,” Farrington says.

No matter which option you choose, just remember that the administrative forbearance period is set to expire on Dec. 31, 2020. Interest and payments will resume at that time, so sketch out a plan now so you’re prepared when the time comes.

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