Buzz
The majority of federal student loan borrowers don't need to make any payments until October 2020, and won't face interest accruing on the remaining balance during this period.
If paying bills has become a struggle due to the coronavirus pandemic, the automatic forbearance period might offer substantial relief.
However, if your financial situation is stable, you might be curious about the potential benefits of continuing to pay your student loans even if it's not mandatory. Is it worth making payments during this time?
To start, it's essential to grasp the impact of this administrative forbearance on your loan balance. Any payments you make during this period will directly reduce the principal. You’re not required to make your usual payment if you prefer to contribute a different amount. Whether you decide to pay a small amount or defer payments until October, there won’t be any penalties.
Now, let’s explore a few scenarios to help you decide if it’s worth making any payments right now.
Imagine you have $8,300 remaining on your student loan with a 5% interest rate. You have three years to repay it, meaning monthly payments of about $248. You’ll complete the loan in April 2023, and by that time, you’ll have paid $655 in interest.
Currently, your loan is essentially paused. Interest isn't accumulating, and you don’t need to make payments. Let’s say you can only contribute $500 during the six-month administrative forbearance. This will reduce your balance from $8,300 to $7,800. Once payments resume, you’ll be paying $234 monthly for three years. By the time your loan is paid off in April 2023, you’ll have only paid $616 in interest.
Alright, a $40 reduction in interest might not seem significant (though you also get a $14 reduction in your monthly payment). Now, let’s consider another scenario.
Let’s say you choose to use all your coronabucks to pay down your student loan.
You could apply that $1,200 to your loan, reducing the balance to $7,100. When payments resume in October, you stick to your original payment plan of $250 per month, even if your servicer suggests a lower payment. This lets you pay off the loan six months early, clearing your debt in October 2022 and paying only $467.75 in interest. You save $188 in interest and become debt-free sooner.
For those who want to accelerate their debt repayment right now, making one or two payments (or continuing your regular payment schedule) could significantly reduce the total amount owed.
Each payment you make reduces your debt slightly, simply because you’re lowering the balance on which interest accrues. Since student loan interest builds up daily, the quicker you pay down your principal, the less interest you'll end up paying over the life of the loan.
However, if you're facing financial instability at the moment, it might not be worth the added stress to make student loan payments when you're not required to do so.
When you're dealing with high-interest debt, such as a credit card balance, it's crucial to prioritize paying that bill promptly or, alternatively, setting up a payment arrangement with your credit card company. The fundamental needs for shelter, food, and safety should take precedence over any immediate financial optimization concerns.
