In a move that has many students and graduates sighing of relief, the Biden administration has extended the student loan forbearance to January 31st, 2022. Initially enacted at the beginning of the pandemic to relieve financial stress, this pause on all required federal student loan payments will undoubtedly help millions across the country who are struggling to pay off their loans, who lost their jobs due to the pandemic, or who just need some extra cash to pay their rent this month.
"The payment pause has been a lifeline that allowed millions of Americans to focus on their families, health, and finances instead of student loans during the national emergency," U.S. Secretary of Education Miguel Cardona was quoted as saying in the official press release for the U.S. Department of Education. The fact of the matter is that the pandemic isn’t over yet, and the mission of this moratorium remains the same.
In the 2018-19 academic year, 43% of first-time, full-time degree and certificate seeking undergraduate students were given a federal student loan, according to the National Center for Education Statistics. This policy is likely affecting nearly half of students and graduates, leaving many people to ask themselves the question, should I continue paying off my loans, despite the extension? The ability to even ask this question is undoubtedly a privilege, as many people don’t even have the choice. But if you do have the ability, it’s important to consider both the reasons to pay and not to pay off student loans during the forbearance period.
With the help of Northwestern University’s Financial Aid Director Phil Asbury, Loop will dive into the pressing debate: to pay or not to pay.
To Not Pay: If You’re In Hot Water Financial
This policy was enacted for a reason: because people are struggling to support themselves and loved ones during the COVID-19 pandemic. If you are one of these people and this extension has brought you relief, by all means, take advantage of it. “You might have basic needs that you need to address,” Asbury says. “The pause of the loans is a great thing, it can help you to feed your family.” Whether you need the money for food, for rent, or to cover other expenses, necessities can and should take priority over loans that aren’t yet due.
For example, “You don't want to lose your car, so if you're out of work, and you have a car, you need a car to find another job,” Asbury reasons. “So, you might take advantage of this pause and just use that money to pay your car payment.” These basic needs that will help your financial future and well-being come first.
To Pay: Take Advantage of Zero Percent Interest
When taking out federal student loans, there is usually an interest rate of three to four percent, depending on the rate determined that year. But what happens during this pause is that they didn’t just pause the payments, they paused the interest as well. As explained by Asbury, “If I were in this scenario where I was in repayment on a loan, I would pay everything I could during this period, because what will happen is eventually that the interest will start up again. But if I make payments now, I can apply that toward the principal of the loan.”
In other words, you would not only save money by not having to pay interest, but you also would be lowering your principal amount of the loan that interest will be charged on in the future. “When I reduce the principal and then they recalibrate, I owe less interest over the life of it, because I'm being charged a rate on a lower amount of money,” Asbury went on to explain. Therefore, if you’re able to continue paying off your loans while addressing your other more pressing needs, it may be a smart idea that will save you money in the long run.
To Not Pay: If You Have Other Debt To Pay Off At A Higher Interest
As aforementioned, there is a zero percent interest on all payments made towards student loans that are paused due to the extension. But we can’t forget that there’s still interest rates running on all other forms of debt we may be in, and those should likely be addressed first.
“If you have other debt that is set at a higher interest rate, you would want to pay that debt first,” Asbury says. “If you're running a balance on a credit card, take care of your credit card and use this pause to do that.” Because student loans can be such a huge financial burden, this pause is a great opportunity to take care of other debt with higher — or simply existent — interest rates.
“When I mention the advantages of paying, that's assuming that you don't have other obligations that are more critical than the paying of the loans,” Asbury says. These critical obligations would be paying for food, mortgage, your car, and other necessities, as well as other debt that should be confronted.
To Pay: It’s Over With Sooner
This one is pretty self explanatory: Who doesn’t want to have student loans off of their plate as soon as possible? “If I can afford it, and if I haven't been impacted negatively financially by the pandemic,” Asbury explains, “then I can just keep paying and I'll have the loans paid off sooner.” The key phrase, however, being “if I can afford it.” While paying student loans off early and being done sounds like a dream, it isn’t a reality for many adults and families who were greatly impacted by the pandemic.
If possible, continuing to pay off student loans during the extension could be a smart choice that will save you money in the future and get rid of your debt sooner. But the extension exists to help people, and if it can help you and lighten your load, then use it. There’s not much quite as stressful as student debt, but until January 31st, 2022, we can all take a breath.