If you live with student loans, you’ve likely been paying close attention to our government’s ongoing debates about enacting public student loan forgiveness—to the tune of $50,000, $10,000, or none at all. The context is familiar: the average American student loan debt hovers around $30,000, and was a repayment crisis loomed even before the COVID-19 pandemic sent many younger Americans into a financial tailspin.
Right now, interest on federal student loans is paused through Sept. 31 in response to the pandemic. Should you continue making regular payments on your federal loan to reduce your principle? Unless you’re flush with cash, the answer is “no.”
Interest is what matters
Having serious student debt often means familiarizing yourself with popular advice around repayment options. My own starting balance of about $115,000 meant studying every option, from Public Service Loan Forgiveness, to bankruptcy, to exploring what would happen if I just left the country and never returned. I cycled through each stage of grief until finally settling on an aggressive repayment plan—one based on paying to principle whenever possible—yet I haven’t paid a dollar since the CARES act paused federal student loan interest in March, 2020 because there’s no benefit in making regular payments when I’m not being charged interest.
The key word here is “regular.” Regular payments means chipping away at your principle, ultimately reducing the amount you’ll pay back overall by cutting into what you’ll pay in interest. It’s a great goal for those of us in debt, but it’s only time sensitive when interest is actively accruing. While interest is suspended for months to come, there’s no difference between the effect of regular monthly payments and that of skipping them altogether, putting that money in a preferred savings account, and paying that lump sum just before interest is scheduled to continue. People who can afford it will be better off making a student loan payment the day before interest restarts, instead of contributing the same amount via regularly monthly payments.
What popular financial advice gets wrong
It may seem like a minor nuance, but it’s an important one—and one that flies in the face of popular financial advice often shared by people who might not know what it’s like to struggle financially in this context, if at all. The problem with making regular monthly payments is that we’re still a pandemic, and doing so assumes future stability in a time where the floor can still fall out, leaving us potentially wishing for those thousands already paid back. It undervalues the nest egg you could otherwise build for dual purposes: if times get rough you can rely on what you saved, and if your finances stay stable you can pay that lump sum before the interest period resumes, and not a moment sooner.
None of us know when we’re going to suffer a financial shock, pandemic-related or not, and that’s what makes them so scary—an unforeseen job loss, medical bills, or funeral costs can sabotage your finances at any time. Stopping student loan payments and interest shouldn’t be seen as solely a benefit to those who are actively drowning in the avalanche, but also an opportunity for those one step ahead of it to gain some distance from the snow overtaking us.
Instead, build a larger nest egg
While you aren’t being charged interest, there’s no benefit to making regular payments and forfeiting a nest egg you might need in the event you begin losing financial ground. Consider saving that money instead, making an extra-large safety net for yourself if possible. Then, if you don’t need it, you can pay a big lump sum on Sept. 29, or whatever day interest charges ultimately resume. It’s one small step you can take to help build peace of mind in uncertain times.