Money

Student loan borrowers have 4 more months without payments. How to make the most of the extra cash

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1. Add to your emergency savings

“It may not seem like much, but $100,000 earning 0.50% is $500 a year,” aid Allan Roth, founder of financial advisory firm Wealth Logic in Colorado Springs, Colorado.

You’ll just want to make sure any account you put your savings in is FDIC-insured, meaning up to $250,000 of your deposit is protected from loss.

2. Address credit card debt

With interest rates on most federal student loans at zero, it’s a good time to make progress paying down more expensive debt.

The average interest rate on credit cards is currently more than 16%.

However, make sure you have enough in your emergency savings account before you address credit card debt, said Ted Rosman, an industry analyst at Creditcards.com.

That’s because your credit limit shouldn’t be relied on as a safety net.

“Many people had their credit card limits cut unexpectedly over the past year as lenders got especially worried about risk,” Rossman said.

But assuming you have an adequate cash cushion, knocking down credit card debt can save you a lot of money.

You could continue making payments each month … or save the money and make a lump sum payment on your highest-interest loan before interest accrues again …

Anna Helhoski

student loan expert at NerdWallet.com

Rossman provided an example: If you’re carrying $5,500 in credit card debt and make only the minimum payments each month, you’ll be stuck paying for more than 16 years and shell out an extra $6,163 just in interest, assuming your getting dinged the average fee.

If you dedicate an extra $400 per month for just the next four to that balance, however, it’ll trim almost three years off that schedule — and you’ll save $2,162 in interest by doing so.

Morgan Hopkins, a director of political strategies at a national nonprofit, has paid off more than $17,000 in credit card debt during the payment pause for student loan borrowers.

And that’s opened other doors for her.

“I’m able to save more, invest more in retirement,” Hopkins, 32, said. “It’s such a relief.”

3. Consider still paying your student loans

There’s a big caveat here, however. If you’re enrolled in an income-driven repayment plan or pursuing public service loan forgiveness, you don’t want to continue paying your loans.

That’s because months during the government’s payment pause still count as qualifying payments for those programs, and since they both result in forgiveness after a certain amount of time, any cash you throw at your loans during this period just reduces the amount you’ll eventually get excused.

4. Other options

Some borrowers may want to invest the extra cash. They’ll likely thank themselves later for doing so. The S&P 500 Index is up more than 20% for the year.

Another possibility: If you’re financially comfortable during the pandemic and it doesn’t make sense for you to continue paying down your student loans, then donate the extra cash.

You can make sure an organization is reputable using tools like the Better Business Bureau’s Wise Giving Alliance or Charity Navigator, Helhoski said.

If the charity is registered as a 501(c)(3), you’ll even be eligible for a tax break.

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