Student loan borrowers’ financial loads just became a lot lighter after being given an extension on federal student loan payments, interest, and collections. The extension will last until August 31, 2022, in order to “give borrowers time to gain financial security as the economy more time to improve and covid cases to decline,” said U.S. Secretary of Education Miguel Cardona.
The loan repayment pause started two and a half years ago, in March 2020, when the pandemic began. “The extension will provide additional time for borrowers to plan for the resumption of payments, reducing the risk of delinquency and defaults after the restart. During the extension, the Department will continue to assess the financial impacts of the pandemic on student loan borrowers and prepare to transition borrowers smoothly back into repayment,” said the Department of Education.
The pause is aimed at providing financial relief to all student loan borrowers, including:
- Borrowers with delinquent and defaulted accounts: these borrowers will be able to enter a “fresh start” on repayment, and their accounts will be revived to good standing. The impact of delinquency and default will be eliminated from their accounts.
- Borrowers who have been defrauded by their institutions: these borrowers can petition for some or all of their student loans to be dismissed if they feel they were defrauded or misled under state law by their college, university, or trade school.
- Borrowers eligible for the Public Service Loan Forgiveness program: these borrowers are eligible public service workers who get their remaining debt fully wiped out after making 10 years' worth of payments, 120 payments total.
Now that people can pocket extra money, what should be done with it? BET.com compiled four practical financial tips for the student loan pause:
1. Think about paying for your necessities
Necessities are your fundamental expenses. They count as any expenses that must be paid for: food, rent, gas, or mortgage. Taking care of those things first is essential to survival, and a little extra money saved from this student loan pause can go a long way.
2. Consider building an emergency savings
An emergency fund provides a much-needed cushion for out-of-the-blue expenses, like car repairs, medical bills, and pet emergencies. According to Credit Karma, an emergency fund typically covers between three to six months of expenses. But savings can vary depending on lifestyle, income, monthly costs, and more. If you want to build your emergency fund or start one from scratch, now could be a good time to do it. By the time student loan payments restart, you’ll have a safety net for financial emergencies.
3. Add money to a retirement plan
Many financial advisors recommend people start saving for retirement as soon as possible, especially if you have a company that will match a person's savings. If you put money into an employer-backed 401(k), most companies will match your contribution to a specific percentage. You could also put your money into an Individual Retirement Account (IRA).
4. Pay down high-interest debt
Paying down high-interest debt, like credit cards and personal loans, could be helpful for certain people. These interest rates are often higher than rates on student loans, so paying them down could help you save money in the long run. Consider trying the debt avalanche or debt snowball methods. Using the debt snowball method, you'll first pay off the smallest debt balances. Using the debt avalanche method, you'll pay off the debt balances that carry the highest interest rates first.