- The federal government has extended the deferral of student loans until January 31, 2022.
- Even if it isn’t required, you may want to keep paying back your student debt.
- You might also consider putting money in your emergency fund or saving for retirement.
- Read more about Insider Loans for Student Loans here.
The Biden Administration announced last week that the government’s coronavirus-induced leniency on federal student loans will continue through January 31, 2022. Administrative officials say this will be the last time the payment break will be extended.
For borrowers who were unwilling to resume payments in late September when payments were supposed to resume earlier, the news is a welcome relief. Now that you have four more months before you need to start paying off your student loan, you have several options to make the most of your extra time.
1. Keep paying back your student loans
Maybe you want to keep Make payments for student loans if your finances have not been adversely affected by the COVID-19 pandemic.
Usually, when you repay your loans, you will have to pay the loan amount and interest. Since you will not be charged any interest in the next few months, your payments flow in full towards the loan principle. This could be a unique opportunity to settle your balance faster and pay less total interest.
You will also build a good habit of making consistent payments and keeping track of your financial obligations. This habit can help you avoid late or missed payments that can affect your creditworthiness.
2. Deposit into a high-yield savings account for a one-time payment
With a high-yielding savings account, you can keep your money safe with guaranteed returns. Most of the above
today pay an interest rate of around 0.50%, which is compounded daily and paid out monthly.
You can create an account aimed at saving for your student loan debt and set aside a certain amount of each paycheck. If you have a high-yield savings account with buckets, such as one with Ally, you can set a goal of how much you want to save by a certain deadline.
Using a high yield savings account can be more beneficial than just monthly payments because your money can grow and you can withdraw it if you need cash in an emergency. You can also add all interest to your debt.
Your money will grow slowly with each contribution and is easily accessible. When payments resume in February, you can use the money you deposited in the account with a lump sum for your student loan.
3. Pay off high-yield debt
Interrupting payments on student loans can give you the opportunity to pay off high-interest debt such as credit cards and personal loans, which can sometimes come with an APR in excess of 30%. These interest rates are often higher than the student loan interest rates, so you can focus on these instead to save money.
Take stock of your debts and consider whether or not you have that Avalanche of debt or snowball Strategies. The debt avalanche strategy focuses on paying off the balance of your highest interest debt first, while the debt snowball strategy focuses on paying off the smallest debts first.
4. Build an emergency fund
An emergency fund provides a safety net for unexpected expenses such as house and car repairs, medical bills, and defective electronics. It can also protect you if you lose your job. An emergency fund usually covers three to six months of expenses.
If you don’t have an emergency fund, or it’s smaller than you’d like, now may be a good time to top it up. Instead of making monthly contributions to your student loan, you can divert the money you wanted to pay – at least your minimum monthly loan payment – into your emergency fund.
When the student loan payments resume, you will have a nest egg to protect you from financial emergencies.
5. Invest money for retirement
Once you’ve built an emergency fund and are happy with how much you’re adding to your student loan debt, you may want to start investing money for retirement. The sooner you save for retirement, the more time your money has to grow.
You can put money into an employer-sponsored 401 (k) and often your contributions will be adjusted up to a certain percentage, which is essentially “free money”. You can turn your money into one too Roth IRA or a traditional IRA.
6. Invest in the market
Make sure that all of your other financial goals are in order before you prioritize investments. Investments are not guaranteed by the FDIC, so it is possible to lose money in the market.
This is the riskiest choice of all the options listed, but it also has the potential for the highest return on your money. If you are a beginner and want to learn how to invest in stocks outside of your retirement account, check out our guide.
Extending student loan deferrals by several months gives you time to advance your loan payments or build a safety net elsewhere. Prioritize your financial goals and invest money in the ones that matter most to you.
Junior credit reporter