Most federal student loan borrowers don’t have to make payments until October 2020, without the risk of interest building up on the balance during that time.
If you’re having a hard time paying your bills during the coronavirus pandemic, that automatic forbearance period may take a gigantic weight off your shoulders.
But if you’re not facing dire financial straits, you might be wondering what would happen if you just kept paying toward your student loan debt. Is it worth making payments, even though you’re not required to?
First, it’s important to understand what this administrative forbearance means for your loan balance. Any payments you make during this time will go toward the principal balance. You don’t have to make your “usual” payment if you want to put money toward your loans—you can pay any amount. And whether you pay a bit or don’t touch your loans at all until October, there are no penalties.
Now let’s take a look at a few scenarios to help you decide whether it’s worth trying to make any payments right now.
Say, hypothetically, you’ve got $8,300 left on your student loan that has an interest rate of 5%. You have three years to go to pay off your loan, which means you pay about $248 per month. You’ll be finished paying in April 2023, and between now and then, you’ll pay $655 in interest.
Right now, your loan is frozen in time. Your interest doesn’t accrue and you don’t have to make payments. Maybe you can only throw $500 at the total during the six-month administrative forbearance. That takes your balance from $8,300 to $7,800. When repayment starts again, you’ll have three years of payments of $234 per month, and when you finish paying your loan in April 2023, you’ll have paid $616 in interest.
OK, so getting a $40 discount on interest fees may not seem like much, (although you do also get your payment reduced by $14 discount per month). Let’s take a look at another scenario.
Say you decide to take all your coronabucks and put them toward your student loan.
Let’s lop that $1,200 off the top, making your balance $7,100. When the clock restarts in October, you stay on your original payment timeline, paying $250 per month even if your servicer says your minimum payment is less than that. You’re able to pay your loan in full six months early, getting out of the red in October 2022, and paying $467.75 in interest. You save $188 in interest and get out of debt early.
If you’re someone who wants to move full steam ahead on your debt payoff plan right now, making a payment or two toward your loans (or keeping your “normal” payment schedule) could put a considerable dent in the amount you owe.
And any payment you make reduces your overall debt a little bit, for the sheer fact that you pay less interest on a lower balance. Student loan interest accrues daily, so the faster you chip away at your principal, the less interest you’ll have to pay over the life of your loan.
But if you’re dealing with financial instability right now, well, it may not be worth the stress to try to make student loan payments when you don’t need to do so.
If you have high-interest debt like a credit card balance, it’s more pressing to pay that bill on time, or work out a payment plan with your card issuer. And the basics of accessing shelter, food, and safety go above and beyond any pressure to optimize your finances right now.