3 Ways to Use Student Loan Interest Relief to Your Advantage
Last week, President Trump announced a student loan interest exemption as part of its emergency declaration to fight the coronavirus pandemic.
While not as extensive as many student loan borrower advocates would like, the waiver does create some relief for student loan borrowers. What is more interesting are the possibilities of using this waiver to improve your financial situation.
Here are three ways you can use the Student Loan Interest Relief to help you meet some short-term financial goals. Note: These ideas are not for everyone, as they require paperwork, tracking, and due diligence regarding your own financial situation. If you don’t have time to keep track of your loans, just keep making your monthly payments as usual.
What is the Student Loan Interest Relief?
Last week, Trump declared a national emergency due to the coronavirus pandemic. As part of that statement, he said he would waive interest on student loans held by the federal government for the duration of the emergency. While some wondered if he was legally allowed to do so, the education ministry said it will work to make this happen, retroactive to March 13, 2020.
The details of the waiver relate to the following loans:
- Direct student loans
- FFEL and Perkins loans held by the federal government
If you have these loans, the interest on your loans will not accumulate during the national emergency. However, you will still need to make your full monthly payment.
Plus, if your qualifying loans are deferred or forborne, interest won’t accrue either. This opens up exciting opportunities for sophisticated borrowers.
1. Use forbearance and pay off private student loan debt
The first idea is for borrowers who have federal and private student loans (or it could be any type of private debt, like credit cards). You can put your federal loans on hold by calling your lender. Since forbearance is currently interest free, your federal loans essentially stop during this time.
You can then make full payment on your federal student loan and make additional payments on your private student loans or other debts.
This works well because private lenders do not currently offer any type of assistance program. And eliminating private student loans and other debt is a smart move before a looming recession and other financial woes.
When the national emergency ends, you can resume your federal loan payments as usual, while hoping that you have made a big dent in your private loans.
2. Use tolerance and boost your emergency fund
With a recession looming and the potential for job loss and other financial problems, bolstering your emergency fund can also be a smart move.
You can use the same strategy as above – forborne your loans – and then save that monthly student loan payment instead. This can give you a cash reserve if you are worried about losing your job due to the pandemic or a future recession.
3. Reallocate Payments to Certain High Balance Loans
Finally, if you have multiple student loans, you can take this interest-free opportunity to reallocate payments to your highest balance loans. This is especially useful if you’ve been following an income-based repayment plan and haven’t made great progress on your loans.
Because your highest-balance loans earn the most interest, by making additional principal payments now, you can reduce your student loans more than if you had to pay interest and principal.
If the emergency declaration lasts six months, you can give yourself half a year ahead of your student loans. It can be a huge victory.
These three strategies are only for those who are diligent in planning and prioritizing their student debt.
If you’re currently having trouble, you may just have to put your loans on hold to use that money within your current budget – and that’s great, too. But if you have the flexibility and are able to keep up with your loans, these strategies can give you quick payoff on your debt.