Scholar mortgage payments aren’t due till the autumn. Find out how to use the additional cash
Serhii Shleihel | iStock | Getty Images
Here’s what you probably shouldn’t be doing with that extra cash, since you won’t have to pay your student loan bill until October: sink it all into GameStop stock.
But there are financially sound steps you can take with the extra money and you will likely see thanks for the future. (They might not sound as exciting as day trading, but these suggestions are also far less likely to result in heavy losses – and heart palpitations.)
The US Department of Education has stated that federal loan borrowers will not have to pay their monthly bills for an additional eight to nine months. And accrued interest is suspended during this break.
More from Personal Finance:
College can cost up to $ 70,000 a year
A free college could become a reality under Biden
Tensions are mounting in distance learning in Georgetown
Of course, many people are unemployed during the crisis, and even if they are exempted from student loans, they will struggle to keep up with other bills. But for those who haven’t seen a major drop in income, the deal provides an opportunity to redirect the money into savings, debt, or other goals. The average student loan bill is $ 400 per month.
“This break expands the ability for student loan borrowers to review their finances, which depends on what is most important to them,” said Anna Helhoski, student loan expert at NerdWallet.com.
Below are some smart ways to use that extra cash.
1. Create an emergency savings account
We are in unprecedented times, and even if you have held onto your job until now, you have no idea what may happen in the next few months. Experts say it is more important than ever to have a healthy savings account that you can fall back on.
“More than a third of American workers lost their jobs during the pandemic, and it’s not over yet,” said college professional Mark Kantrowitz.
Try to accumulate at least six months of cash spending if you are going through a period of unemployment, Kantrowitz said.
Keep your money in a high yield savings account for the best possible return on your money. Also make sure the account is FDIC insured which means up to $ 250,000 of your deposit is protected from loss.
2. Pay off any credit card debt
With zero interest rates on most federal student loans, it’s a good time to make progress in paying off more expensive debt. The average interest rate for credit cards is currently over 16%.
However, make sure you have a healthy emergency savings account before you deal with credit card debt, said Ted Rosman, industry analyst at Creditcards.com.
That’s because your credit limit shouldn’t act as a safety net.
“Many people had their credit card limits unexpectedly lowered last year because lenders were particularly concerned about the risk,” Rossman said.
However, if you have a decent cash reserve, you can save a lot of money by reducing credit card debt.
Rossman provided an example: If you have $ 5,500 in credit card debt and you only make the minimum monthly payments, you will not have to pay for over 16 years and will only pay you an additional $ 6,072 in interest.
However, if you set aside an additional $ 400 per month on that balance for just the next seven months, it cuts that schedule by six years – and saves you $ 3,733 in interest.
3. Do you keep paying your student loans?
If you have a decent savings account and no credit card debt, it may make sense to keep paying off your student loan even during your break.
If the interest is temporarily suspended, all payments will go straight to the principal of your debt, potentially shortening your repayment period.
“You can continue to make payments each month by contacting your servicer, or save the money and make a lump sum on your highest-interest loan before interest accrues again when the repayment starts again,” Helhoski said.
There’s one big caveat here, though: if you’re on an income-based repayment plan or looking to get public service loans, you don’t want to keep paying your loans.
That’s because months during the government’s payment hiatus are still considered qualifying payments for these programs. Since both lead to forgiveness after a certain amount of time, any money you throw on your loans during that period will only reduce the amount you will ultimately receive in apologies.
4. Other options
alexsl | E + | Getty Images
Some borrowers may want to invest the extra money. So you can make the most of the money.
For example, if you invest $ 400 per month for the next eight months, or a total of $ 3,200, your investment will grow to more than $ 5,800 in 10 years, assuming you get a 6% annual return.
Another option: if you are financially comfortable during the pandemic and it doesn’t make sense for you to keep repaying your student loans, donate the extra money.
You can make sure an organization is reputable by using tools like the Wise Giving Alliance or the Better Business Bureau’s Charity Navigator, Helhoski said. If the charity is registered as 501 (c) (3), you are eligible for a tax break.