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The Biden administration has extended the federal student loan payment pause a final time, meaning borrowers won’t owe money or accrue interest until Dec. 31, 2022. While a new NerdWallet survey shows that over a third of federal student loan borrowers (35%) have continued making loan payments throughout the automatic forbearance, others have chosen or needed to put this money elsewhere.
With this final extension, federal borrowers whose essentials are covered have four to five more would-be payments that they might apply toward different goals. If you aren’t sure how to best use your remaining payment reprieve, here are five suggestions, plus next steps in case you aren’t ready to resume payments in January 2023.
1. Save it in your emergency fund
Around 1 in 8 federal student loan borrowers (13%) say they put loan payment money into a savings account, according to the survey. The COVID-19 pandemic has been financially devastating for many, highlighting the importance of emergency savings. Ideally, you’d save three to six months’ worth of expenses, but even $500 or $1,000 stashed away can make a big difference in your peace of mind and ability to handle the unexpected.
2. Pay off high-interest debt
The survey found that some federal borrowers put would-be payment money toward paying off/down credit card debt (20%), private student loans (12%) or another type of debt (14%). If you’re comfortable with the amount you have saved for emergencies, focusing on high-interest debt can have a meaningful impact on your overall interest costs, especially with federal student loans at 0% interest for the next several months.
3. Avoid high-interest debt
Speaking of high-interest debt, a credit card balance of $1,000 with an interest rate of 16% would cost $160 in interest charges if carried for a year. If you don’t have any high-interest debt, but have upcoming purchases you'd otherwise let sit on your credit card — like a home improvement project or holiday expenses — you could use would-be federal loan payment money to pay for these purchases upfront. That way, you can avoid interest charges and the stress that may accompany a hefty credit card balance.
4. Put it aside to pay in one go
While payments aren’t due now, your main financial priority may be paying off your federal student loans. You can make monthly payments as normal or hang on to the payment money and make one large payment right before the pause ends. With this approach, you have cash on hand as a buffer in case something comes up. If nothing does, you can avoid the interest you'd otherwise accrue on the student loan principal.
5. Contribute to an IRA
Around 1 in 6 federal student loan borrowers (16%) say they invested the money that would otherwise go toward their loans for retirement, according to the survey. If you’re comfortable with the amount you have in emergency savings and aren’t paying off high-interest debt, you may choose to put would-be payment money into an IRA.
An IRA is a tax-advantaged retirement account that a person with taxable income (or someone who has a spouse with taxable income) can contribute to. The current annual limit is $6,000, or $7,000 for those ages 50 and older. IRA contributions for 2021 can be made until your tax return filing deadline, so even the January loan payment money can help you increase your retirement savings and potentially reduce your taxable income.
If you can’t make payments, evaluate next steps
Around a third of federal student loan borrowers (34%) say they’re using loan payment money for necessities, like rent and food, which could indicate that these expenses might not be met otherwise. When asked when it’s financially feasible for them to start making loan payments again, 11% of federal loan borrowers say 2022 or beyond and 10% of borrowers say they don’t know when they’ll be able to do so, according to the survey.
If it’s not realistic for you to restart payments after Dec. 31, 2022, you have options to avoid defaulting on your loans. For borrowers who can’t pay the full amount due, an income-driven repayment plan could be a good option. It caps your monthly payments at a certain percentage of your discretionary income and forgives the remaining balance after 20 or 25 years, depending on the specific payment plan you enter into.
If you meet eligibility requirements — for instance, if you’re unemployed, receiving welfare benefits or undergoing cancer treatment — student loan deferment will pause your payments completely and may even stop accruing interest (depending on the type of loans you have).
If you don’t qualify for deferment, student loan forbearance is also an option. You can put loans in forbearance for up to 12 months at a time, but you’ll accrue 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 necessary breathing room if your budget simply won’t allow you to make student loan payments right now.