Here are some wise money movements to be made during the break in student loan payments

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The U.S. Department of Education has offered most federal student loan borrowers the option to suspend payments with no accrued interest until September because of the financial consequences of the pandemic.

Most accepted. In fact, only around 10% of the country’s 44 million student loan borrowers are currently paying back their loans, according to data from college researcher Mark Kantrowitz. The rest is not.

Of course, many people who have taken a break from their monthly bills have to redirect the extra money to essentials after losing jobs and income.

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For others, however, the payment break gives borrowers an opportunity to build a stronger financial base. The average student loan bill is around $ 400 per month, according to Kantrowitz.

For example, Morgan Hopkins, director of policy for a national nonprofit, paid back more than $ 17,000 in credit card debt during the hiatus. And that opened other doors for her.

“I can save more, invest more in retirement,” said Hopkins, 32. “It’s such a relief.”

Below are some clever ways to use that extra cash.

1. Build your emergency savings

Even if you’ve managed to hold on to your job by now, you don’t know what might happen in the next few months.

According to experts, it’s important 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,” Kantrowitz said.

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. Cope with the 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 looking into credit card debt, said Ted Rosman, industry analyst at Creditcards.com.

That’s because your credit limit shouldn’t be used 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 cushion, 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 are only making the minimum monthly payments, you will not have to pay for more than 16 years and pay an additional $ 6,072 just for interest.

However, if you only put an additional $ 400 per month on that balance for the next seven months, that will cut that schedule by six years – and save you $ 3,733 in interest.

3. Consider continuing to pay off your student loan

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 the 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 still make payments every month by contacting your servicer, or save the cash and make a lump sum on your high-yield loan before interest comes back when you restart the repayment,” said Anna Helhoski, student loan expert at NerdWallet.com.

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 qualified 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 only reduces the amount you ultimately get apologized for.

4. Other options

Some borrowers may want to invest the extra money. You’ll likely thank them for it later.

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 loan, 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 also entitled to a tax break.

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