3 Ways to Take Advantage of the Federal Student Loan Pause

By: Stacey Nickens

At the beginning of August, the Department of Education announced that they will be extending the pause on federal student loan payments. The moratorium was set to end on September 30, 2021, and will now continue through January 31, 2022. The Department of Education said that this fourth pause on payments will be the final pause granted during the pandemic.

Only federal student loans are covered under this moratorium. These loans include Federal Direct Loans (such as PLUS Loans), Federal Perkins Loans, and Federal Family Education Loan (FFEL) Program loans.

This announcement gives federal student loan holders four additional months to take advantage of this payment pause. If you have a federal loan, how could you make the best use of this time?

Strategy 1: Take advantage of the 0% interest environment to pay off your student loan principal. 

During the federal student loan payment moratorium, interest does not accrue on federal student loans. However, borrowers are still allowed to make payments. With interest rates effectively set at 0%, a borrower’s payment will be entirely applied to their principal. With that said, you could choose to make full or partial payments, reducing the amount of interest you will be required to pay in the long-term.

Strategy 2: Rehabilitate your credit if you have defaulted on student loans. 

Those who have defaulted on federal student loans can qualify for loan rehabilitation by making nine on-time payments within a 10 month period. The months during this moratorium will count towards this nine-month period. At the end of the moratorium, borrowers interested in rehabilitation will need to make a lump sum payment equivalent to the on-time payments due to qualify for rehabilitation.

With that said, you could use this time to save towards that lump sum payment.  It may be helpful to know that collections on defaulted, federal student loans will also be put on pause through January. Those who have their wages garnished due to defaulted federal loans will receive a refund for the amount of wages garnished during the moratorium. Additionally, borrowers who work in public-service jobs will still be able to count these moratorium months towards loan forgiveness.

Strategy 3: Pay off high-interest debt.

You could use the money you normally put towards student loans in order to pay off high-interest debt, such as credit card debt. Doing so would improve your credit and reduce your long-term debt load. Similarly, you could use the saved money to build an emergency fund or contribute to a retirement savings account.

If you have any questions about this pause, or need assistance in managing your student debt, please do not hesitate to reach out. The Elm3 team would be happy to assist in developing a financial plan for you that could assist you in paying off debt and building a healthier financial future.

Source: Washington Post