Should You Defer Federal Student Loans During COVID-19 Forbearance?


Federal student loan borrowers received welcome relief from their debt in 2020 and 2021. As of March 13, 2020, the Department of Education has suspended payments, recoveries, and interest charges on most state student loans, and that relief is currently in effect until 09/30/2021.

Borrowers do not need to apply for this forbearance as it has been set up to automatically apply for eligible federal student loans. However, while the payment break is automatic, some borrowers can benefit from continuing to make payments on a voluntary basis.

What does it mean to defer student loans?

When you defer student loans, it means that your loan service provider will freeze or reduce your payments for a period of time. Usually, a student loan deferral is only possible if you meet certain requirements Eligibility criteria, such as active enrollment in school or military service.

Another option you may have if you are having difficulty paying your student loan is indulgencewhich can also temporarily suspend payments. In general, you can pause federal student loan payments for up to 12 consecutive months (with a maximum of three years). Interest may still accrue on your loans during the deferral.

The current interest-free payment hiatus is an administrative forbearance that does not count towards your lifetime limit. During this time, you can still make payments, but you are not required to do so.

Should You Defer Your Federal Student Loan During Coronavirus Forbearance?

Eligible borrowers are granted automatic administrative forbearance status on their federal student loans. As a result, both your payments and interest will be suspended if you qualify.

Whether you decide to take advantage of this payment hiatus or keep making payments on your loans depends on what your financial priorities are and what other debts you are facing.

Deferring loan payments gives borrowers flexibility in other areas

What are the benefits of skipping loan payments until the end of September? According to financial advisor Justin Nabity, who also runs Physicians Thrive, the biggest benefit most borrowers get is a disruption in their credit management. With people still trying to recover from COVID-related layoffs and income cuts, Nabity says the deferral may allow borrowers who are short of funds to raise funds for more important expenses.

Having a longer period of time to skip federal student loan payments could help borrowers get in better financial shape overall. Instead of paying student loans, individuals could put the amount of their payments into one high yield savings account. You could also spend this time paying off any high-interest debt, including credit card debt.

It is also advisable to defer your payments if you are in one Income-based repayment planeven if you can afford payments. During this administrative leniency period, suspended payments will still count towards the earnings-based repayment waiver – essentially, you will get free progress towards your plan.

Choosing to make payments could help borrowers pay off loans faster

If your income has dropped drastically, or you are unemployed and looking for work, it makes sense to skip the loan payments for eligible loans until the end of September. However, if you can afford to keep making loan payments, your decision is not that short and sweet.

To start with, a 0 percent interest rate means that every dollar you pay on your student loan goes to the principal. As a result of the continuation of payments, your Loan repayment schedule will shorten and You will save money on interest over time.

Remember, skipping loan payments during the moratorium will also just postpone the inevitable. When the grace period ends, pick yourself up exactly where you were in relation to your repayment period.

Who should postpone their student loan?

Some of the borrowers who will benefit most from this time of administrative forbearance include:

  • People in financial need.
  • Anyone with credit card debt or other high-interest bills could pay them.
  • Borrowers who can deposit loan payments into a high yield savings account.
  • Borrowers with income-oriented repayment plans.

Who shouldn’t postpone their student loan?

Some of the people who should continue to make payments on their student loans include:

  • People who have not lost any income due to the pandemic.
  • Anyone who wants to pay off their loans as soon as possible.
  • Borrowers with large loan balances that will take a long time to repay.

The bottom line

Before deciding whether to make payments during Administrative Forbearance, consider your full financial picture. Borrowers with lots of high-interest debt, such as credit cards or student loans, should use this time to defer federal student loans. On the flip side, borrowers who can afford payments on their federal loans have the option to repay the principal much faster.

Robert Farrington of The College Investor suggests that if you want to make additional principal payments, you should wait until the indulgence ends. “No reason to give the government extra money! Just put it in a savings account and earn 1 percent for yourself, ”says Farrington.

Whichever option you choose, remember that the administrative grace period is on. is set expires on 09/30/2021. Interest and payments will resume at this point, so outline a plan now to be prepared when the time comes.

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