Federal Student Loans Paused: Should You Continue Paying?

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Point of Interest

Student loans have been paused for six months, which last through the end of September. You don’t have to opt for it, though — you can keep making payments and save on interest costs.

As a result of the COVID-19 pandemic, many people found themselves out of work over the last few months or in a much different financial position than they were prior to the outbreak in the U.S. For people with student loan payments, the unstable job market creates a lot of tough questions, including whether you should stop paying your student loans. 

Luckily, the government passed the CARES Act, which put all federal student loans into forbearance for a 6-month period as part of the act. While this was a welcome move for many people who are struggling financially right now, it raises the additional question of whether or not you should continue paying on your loan during this stretch.

Student loans and the current economic climate

In response to COVID-19’s effects on the economy, the president signed the CARES Act into law on March 27, 2020. The law aimed to provide relief for borrowers who may have lost their jobs, are dealing with reduced incomes or are unable to work due to health concerns.

Part of the law automatically paused student loan payments on federal loans from March 13 through September 30 of this year. While the law was signed in late March, it was retroactively applied.

In addition to pausing payments, the act also changed the interest rate on federal student loans to 0% for the time being. In other words, you will not be accruing interest from March to September even though you have an outstanding balance on your loan. The federal loans that qualify for this are defaulted and non-defaulted direct loans, defaulted and non-defaulted FFEL Program loans, defaulted and non-defaulted Federal Perkins Loans and defaulted HEAL loans. The loans must be owned by the ED to qualify.

 If you owe money on qualifying federally backed student loans, you do not need to do anything to take advantage of this benefit. All payments were automatically stopped as part of the CARES Act.

Things to consider before deciding to stop your student loan payments

Just because your federal student loans have been paused does not mean you have to stop paying. If you continue to pay your loans, you’ll be able to cash in on interest savings from the temporary 0% rate. Rather than part of your payment going toward interest and part going toward principal (actually paying down the loan), all of the money you are paying will go toward the principal while student loans and interest are paused.

Before you decide to stop paying your student loan, consider the opportunity that you have. If you are still able to earn money and can continue making your payments with no issues, it might be wise to take advantage of the savings.

If you are in a more precarious financial position or your future is uncertain, you may want to take advantage of the paused payments and save up money to make payments when the loans come out of forbearance. According to a 2019 report, 2 out of 10 people were already behind on student loan payments. When you mix this with the effects of COVID-19, that number is sure to increase. Make sure you consider a long-term plan to ensure you’re ready for what happens after September.

Tip: Remember that the forbearance on federal student loans will end in September. If you can make payments now but might not be able to later, try to save the money now and use it when you are required to pay again.

You should pause your student loan payments if:

While the pausing of your federal student loans was automatic, you still have the choice to take advantage of the pause or continue making payments. There are several situations where allowing your student loan payments to stay paused would be the optimal choice.

  • You are unemployed. Federal student loans were paused for this exact situation. If you are not currently working, take advantage of the ability to save on your loans. Focus your finances on the necessities, like food and housing.
  • The future of your job is in jeopardy. Just because you’re able to pay your student loans now does not mean you will be able to in the future. If you’re able to pay now but don’t know if you will be in the future, there could be value in saving up your money and using it for payments down the road. That way, if you do lose your job, you have a plan in place that extends past September.

You should continue your student loan payments if:

Even though student loan payments have been automatically paused, you still can continue payments. If the conditions are right, you can take advantage of interest savings that would normally not be available.

  • Your job and financials are unaffected. If your work is stable and the financial effects of COVID-19 on you and your family have been limited, you may want to continue making payments. It’s a chance to get ahead on your loans, save on interest and get closer to paying off the debt.
  • Your job is rehiring you or opening back up. If your work was temporarily affected, things might finally be returning to normal. If that’s the case, you can look into continuing your student loan payments. Remember, you can take advantage of the break for a short period and restart your payments whenever you want. It is not an all or none situation.

Calculate your savings

Your loan payment is normally comprised of an interest component and a principal component. The principal is the amount you borrowed and the interest is the additional amount you pay as a fee for borrowing the money. Your interest rate is determined when you take out your loan and is represented as a percentage. Right now your loans are temporarily set to a 0% interest rate.

If you don’t make any payments, you’ll pick your loan back up where you left off once the deferral period is over. You won’t have any overall interest savings, but you will have gotten a break in payments for six months. You will owe the same amount, though.

If you continue to make payments, however, you will save money on interest. Your loan interest is calculated as a percentage of the amount you owe. By making payments at 0% interest, all of the money goes toward the principal and the amount you owe on your loan will decrease. This means the total interest costs will decrease too.

For example, if you owe $10,000 at a rate of 6% interest, you will owe $13,322 over the next 10 years. If you skip payments, the amount stays the same. If you were to make three months’ worth of payments, you would save $222 on the life of the loan.

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The final word

Ultimately, the answer as to whether you should stop paying on your student loans will differ from person to person, and remember that this all only applies to federal student loans. If you have private student loans, contact your lender if you need help making your payments or look into refinancing.