There are some compelling benefits to making federal student loan payments even though the pause has been extended. However, this may not necessarily be the best option for everyone. Whether you should pay or not depends largely on your financial circumstances.
The student loan pause or forbearance was initiated by the federal government in 2020 to offer relief to borrowers affected by the COVID-19 pandemic. After several extensions over two years, the moratorium is scheduled to end on May 01, 2022. For many borrowers, the big question is ‘Should I pay my student loans before the payment pause ends?’
That’s a complex question with an equally complex answer. There is no one answer that’s right for all borrowers. Understanding how the student loan pause works can help you decide whether or not you should make loan payments during the forbearance period.
What Happens If You Don’t Make Student Loan Payments During Forbearance
According to the terms of the student loan relief program, borrowers are not required to make payments on their loans during the pause period. In addition, interest on loans has been waived, which means no interest will accrue on your loans during this period. Also, there will be no collection of student loans in default.
If you choose not to pay, your loans will remain status quo from the day the forbearance came into effect. No interest or late fees will be added or deducted from the loan. When the pause ends, you pick up where you left off. That means you continue with the same repayment plan, the same interest rate, and the same monthly payments. If you want to make any changes, you’ll have to contact your loan servicer and put in a request.
Advantages of not making federal student loan payments in advance – The biggest advantage of not making payments in advance is that it frees up funds that you can use for other more pressing purposes. For example, you can use it to pay off more expensive debt such as credit card debt. If you are unemployed or working reduced hours, that money can help you pay the rent, utilities or groceries. Or you can use the money to build an emergency fund. The pandemic has shown us how important it is for everyone to have one. Another option is to invest the money.
Downsides to not making early federal student loan payments – There are no downsides to not making early federal student loan payments. Your federal loans are in ‘frozen’ status will the pause is in effect. When the pause ends, your loans will become active and will be in the exact same status that they were in before the pause started.
What Happens If You Make Student Loan Payments During Forbearance
If you’re not required to make payments early, why even consider this option? Well, there is one major benefit to making student loan payments before the forbearance ends. You save a substantial amount of money when you pay early.
Here’s how it works when your making optional payments and how it saves you money.
Interest has been waived during the forbearance period. That means there is no new interest accrual as long as the loan repayment pause is still active. When you make any payments during this period, every dollar you pay goes directly towards paying off the principal. Every time you make an optional payment during the forbearance, you lower your student loan principal balance by that much.
When the repayments start, your interest will start accruing on the reduced principal. This early repayment strategy could potentially save you hundreds or thousands of dollars in interest accrual over the loan term.
While overall this is a better strategy, not all borrowers have the funds to consider this option. Limited funds is the only obstacle to availing of the benefits of early repayments.
Advantages of making early federal student loan payments – Paying early allows you to lower the principal balance. A lower principal means lower interest accrual, which can add up to substantial savings. This could also help you to pay down your debt faster.
Disadvantages of making early federal student loan payments – There are no downsides to early repayments if you are on a standard repayment plan. However, if you are seeking Public Service Loan Forgiveness and are still working with a qualifying employer, you may want to hold off on early repayments. This is because the months of automatic forbearance will count toward the 120 payments needed for forgiveness, provided you meet the qualifying employer requirements.
What To Do If You Want To Start Repayments During Forbearance
If you want to start repayments before the pause ends, you’ll need to first get in touch with your federal student loan servicer. This is a private company that manages student loans and payments on behalf of the federal government.
Many loan servicers have ended their contract with the federal government over the past few years. So the first thing would be to check who your federal loan servicer is and get their contact details. You can find this information when you log into your FSA account.
Inform your loan servicer that you intend to start early repayments of your loan and ask them about the formalities involved. Before you do this, create a budget and make sure that you can afford to make these early repayments.
Last but not least, the above information only applies to federal student loans. The student loan forbearance does not cover private student loans. Those payments must continue every month till the debt is completely cleared.