Jill A. Chafin
The CARES Act paused federal student loan payments, but should you really stop paying them?
If you have a federal student loan, your monthly payments are automatically on hold thanks to COVID-19. But while the text of the legislative act that put them on pause is clear enough, whether you should personally take advantage of it isn’t necessarily so clear.
Financial experts always stress the importance of staying on top of debt. However, the pandemic has brought about many unprecedented challenges, with over 40 million Americans now unemployed. Because of this, it might be worth taking advantage of the relief offered for student loans.
The rules for student loan relief are a bit confusing—especially if you’re on track to apply for student loan forgiveness or have a private student loan. You might also be overwhelmed by which loan to pay off—the one with the paused interest, or the one still charging interest?
Let’s try to make sense of it all!
What’s Changed
The CARES Act has helped millions of Americans by sending stimulus checks, postponing mortgage payments, and offering a break from paying off student loan debt.
However, this assistance applies only to federal student loans, not private ones. Some private loan companies are following suit with similar relief options, though. Check with your provider to clarify any uncertainty.
Here’s a quick overview of what the CARES Act means for your student loan:
- Federal student loan payments are suspended: That’s right! You don’t have to pay anything on your federal student loan from now through September 30, 2020.
- No interest: You can also rest assured that your federal student loan won’t generate any interest during this time. Just remember, interest will kick back in at the end of September.
- No debt collection for defaulted loans: There’s no need to fill out paperwork or sign up for the forbearance—it’ll happen automatically. You also won’t receive a bad credit score for pausing payments.
Sounds wonderful, right? However, if you’re able to keep paying your student loan, you should; we’ll explain why.
Should I Keep Paying?
If your income hasn’t changed, you should take advantage of this interest-free phase and continue to pay your student loan. This is wise because every cent you pay will go directly toward knocking down that principal and make a noticeable dent in your overall balance. You might just come out of this pandemic debt-free. Woo-hoo!
However, if you’ve lost your job or your hours were reduced due to COVID-19 (or any other reason), then by all means stop making payments. You need to focus on paying for essentials, like rent, food, and utilities.
Which Loans Should I Focus On?
Perhaps you have federal and private student loans—one is currently interest-free, whereas the other is charging a ridiculously high interest rate. Which one should you tackle first?
It’s recommended that you pay off private student loans first since they don’t offer the same forbearance and forgiveness options as federal loans.
Next, consider which debt payment method will motivate you more. Everyone is different, so you want to pick a method that actually works for you. We’ll cover the two most popular options below.
The Debt Snowball Method
Financial experts like Dave Ramsey highly recommend the snowball method to significantly reduce debt, including paying off your student loans.
Basically, you attack the loan with the smallest balance, disregarding the interest rates completely. The philosophy behind this is that you’ll gain momentum as you see balances shrink and disappear, thus “snowballing” you into paying off more and more debt.
“The debt snowball works because it’s all about behavior modification, not math,” Ramsey said. “When it all boils down, hope has more to do with this equation than math ever will.”
The Debt Avalanche Method
Many financial advisors strongly advise that you attack higher-interest debts first. This logistically makes sense, as those loans are going to cost more over the long-term. And nobody likes wasting money on interest.
According to NerdWallet, “if you tend to be analytical and patient, a debt avalanche may appeal to you.”
Want to try it out? Just type the details of all your loans in this debt avalanche calculator, and it’ll recommend which loan you should focus on first.
In the end, it doesn’t matter which method you go with—you can even experiment with both! Just keep up and make solid payments, if you can.
We recommend using this student loan calculator to see what a difference extra payments can make. For example, say you have a $30,000 student loan that charges 8 percent interest. If you increase your payments to an extra $100 a month, you’ll save $4,296 and pay off the loan an extra 2.92 years earlier. Wow!
What About Public Service Loan Forgiveness?
Many people are concerned about the public service loan forgiveness (PSLF) program during this time. This program allows people who work in public service, such as government, to apply to have their student loan forgiven after 120 continuous payments.
The good news is that pausing your student loan payments won’t jeopardize your ability to apply for PSLF in the future. In fact, your monthly non-payments will still count toward your required 120 payments. Whew!
Keep in mind, you’ll have to get back on track with regular payments at the end of September after the CARES Act student loan support expires, though.
The Bottom Line
If you’re financially able to continue making student loan payments, keep at it. You can even contact your student loan provider to remove the forbearance status so the payments will go through automatically.
Then, take some time to consider which method—the snowball or avalanche—will motivate you to reduce your debt. Also, increase your monthly payments if you can afford it. Any extra amount will make a difference.
However, if you’re experiencing financial difficulty at this time or have medical bills or high-interest credit card debt, it’s okay to hit pause. The student loan relief was enacted for a reason, so don’t feel guilty if you actually need to use it.
