A lengthy reprieve from paying a student loan bill with no penalty? What could beat that?
Last month, the Biden administration announced that coronavirus pandemic relief originally enacted under the CARES Act in March 2020 will be extended, giving most federal student loan borrowers additional bill-paying breathing room through Sept. 30, 2021.
This is great news for tens of millions of borrowers. One less bill during challenging times can provide genuine financial relief. However, if you have been fortunate enough to have steady income through this crisis, there are real benefits to still making payments and being ahead of the game once student loan payments are required again.
With the continued forbearance provided by the federal government, payments and interest accrual on most federal student loans are automatically paused, as well as collections activities on defaulted federal student loans. But this breathing room is only a temporary halt, not forgiveness of the loans. Your debt will be waiting for you when repayment resumes in October unless the reprieve is extended again.
If you are between jobs or working reduced hours, the extra cash from not making student loan payments is helpful for rent, utilities or grocery bills. Also, even if your pay is unaffected, a forbearance could help you start building an emergency fund or help you pay another more pressing debt.
For example, according to a Federal Reserve study, the average monthly student loan payment in 2016 was $393, per the most recent data available. The current eight-month forbearance period would potentially give someone with that monthly payment amount in federal student loans a total of $3,144 to apply to other debt or to build a savings nest egg.
That said, there are five benefits to continuing to pay your federal student loans during this period.
Paying Off Your Student Loan Balance Faster
Making payments while your student loan is not accruing interest chips away at the principal. Your full payment will be applied to the principal amount of your loan after all interest that accrued before March 13, 2020 — plus any fees such as for defaulted loans — are paid. This means your balance may go down much faster with each payment.
Reducing Overall Interest
A lower principal balance reduces the amount of interest you pay over the long term. Because interest has been slashed to 0% during the COVID-19 relief period, your entire loan payment may immediately reduce your loan balance. That means payments applied directly to the principal will also reduce the amount of interest that accrues over time.
Improving Your Credit Rating
Less debt, even student loan debt, leads to an improved credit history and scores. A healthy credit score ultimately means lower costs for borrowing if you are considering an auto loan or mortgage in the near future.
Lowering Your Debt Totals for Overall Financial Health
By lowering your principal, you will also reduce your total student loan debt, which makes for improved overall financial health and reduced stress.
In fact, by paying even a little more than your required monthly payment amount during this no-interest period, you can significantly lower what you pay over the life of your student loans, retire that debt more quickly and increase your ability to achieve new goals.
There are also ways to move the repayment dial ahead by paying interest while you are still in college and paying extra when possible. Just be sure to check how your extra payments will be applied before you start making them.
Practicing Wise Budget Management
Continuing to make those monthly student loan payments, even though you don’t have to and could enjoy extra cash in hand, will instill discipline and manage cash flow toward greater financial goals. It will also make it easier for you to continue these practices when the COVID-19 relief ends and maintain healthy financial habits.
The answer to the “to pay or not to pay” question during this forbearance period is a balance of what will work best for you. Using this time to make a significant dent in your student loan debt can put you ahead in the long term.
More from U.S. News
5 Reasons to Keep Paying Federal Student Loans During the Pandemic originally appeared on usnews.com