Should You Be Paying Down Student Loans?
If you have outstanding Federal student loans, you're probably aware that minimum principal payments and interest accrual on those loans have been put on pause since the first stimulus package was signed into law back in March, 2020 (what a long, strange year it has been). This forbearance continued to get extended throughout 2020 and when President Biden took office, he signed an Executive Order extending the forbearance through September, 2021.
There has also been some talk about forgiving $10,000 in Federal student loans (per person). President Biden has expressed his support for this initiative, but nothing has been confirmed yet. Senate Majority Leader, Chuck Schumer, has pushed Biden to increase the student loan forgiveness to $50,000 per person, but Biden has made it clear that cancelling that amount in student loans would NOT be happening, while still reiterating his support for $10,000 forgiveness.
So what does this mean for you?
Given the forbearance through September and the potential forgiveness of $10,000, this presents some planning opportunities for those with Federal students loans. The best strategy for you really depends on your personal financial situation (like with health, there is no one-size-fits-all recommendation), but here are some things that you may want to consider.
When might it make sense to continue paying down student loans?
If you have over $10,000 in Federal Student Loans…
While anything could change with Biden's forgiveness proposal, as of right now, it does not appear that the forgiveness amount will exceed $10,000 per person. He already made it clear that $50,000 forgiveness would not be happening, so you can count that out for the time being. So if you have over $10,000 in Federal student loans, it's likely that you will be on the hook for that. If you want to get ahead on that amount over $10,000, you could continue paying that down now, while interest is no longer accruing.
If you have private loans…
All this talk of loan forgiveness and forbearance ONLY applies to Federal student loans. If you have a private student loan, you will be responsible for the entire balance plus accrued interest (unless your lender has said otherwise). Therefore, you should continue paying down private student loans on schedule, regardless of what happens with Federal student loans.
If you're losing sleep at the thought of having debt…
There are people out there who just HATE having debt outstanding (for good reason); to those individuals, where debt is like an itch that can't be scratched, it may be worth paying down your Federal student loans, simply for the peace of mind. Remember, money is more than just numbers--personal temperament, behavior, and mental health all play a factor in making money decisions. So if the thought of having $4,000 in Federal student loans outstanding over the next 6 months is a major stressor for you, it may make sense to continue pay that off (even with the possibility that it might be forgiven soon).
When might it make sense to stop paying down student loans?
If you have under $10,000 in Federal Student Loans…
Again, anything could happen, but right now it seems like forgiveness of $10,000 is very possible. So if you're someone who has only $5,000 in Federal student loans, and the concept of "waiting" for that to be cancelled doesn't cause emotional turmoil, it may be worth just waiting. At this point, it's not accumulating interest and monthly payments are on pause, so there's no harm in just waiting around until it gets forgiven.
If you have other debt outstanding…
If Federal student loans aren't the only debt you have, now would be a prime opportunity to pay down other debt. You can take what you would otherwise contribute towards student loan debt and put that towards debt that is still accumulating interest (e.g. auto loan, mortgage, etc.). The faster you pay down that debt, the less interest you'll have to pay over the life of the loan.
If you don't have an emergency fund….
If you've been living paycheck-to-paycheck with no cash in reserve for emergencies, now would be a great time to change that. If 2020 taught us anything, it's that we must expect (and prepare) for the unexpected. Who knows what could happen over the next 12 months…the vaccine could be ineffective against a newer, more contagious strain, leading to more lockdowns. A new technology could make your industry (and job) obsolete. You could encounter a medical disaster that drains you financially. Anything could happen. This is why having at least 3-6 months of cash for necessary living expenses is a high priority when it comes to financial health. So if you don't have that saved up right now, perhaps consider using this break from Federal student loan payments as a way to start building that reserve fund.
If you simply have other saving goals…
Perhaps you don't have any other debt outstanding, your federal student loans are under $10,000, and you have an emergency fund. If this is you, it might be a great chance to start saving up for some other goals: accumulating enough for a down-payment on a home, starting a side hustle, or maybe even just contributing to a Roth IRA for the incredible, long-term tax benefits. Regardless of the goal, this could be an opportunity to explore those avenues while there is no pressure to pay down your outstanding student loans anytime soon.
What am I personally doing with my Federal Student Loans?
Yep, my wife and I have a little bit left on our Federal Student Loans. I have my younger, naïve self to thank for the decision to go to a private college at 18-years-old. Then again, I met the love of my life at that private college, so I guess it was all worth it in the end :) Anyway, my wife and I have been diligent about paying down loans ever since we graduated. And we can finally say that we have less than $10,000 of Federal Student Loans left. On the home-stretch!!
Since we don't have any other debt outstanding and we have a sufficient emergency fund, we've decided to put a pause on paying down our student loans. While it would be nice to say "We're debt free!", we're holding off until we get word from the President on whether or not it will be forgiven. In the mean time, we're using the extra savings for a down payment on a home. If it ends up that the amount won't be forgiven, I'll have a nice chunk of cash ready to pay it off.
As I said before, the decision that is best for you depends on your own unique situation, but I hope this gave you some things to think about.