The Biden administration’s announcement to extend the moratorium on federal student loan payments until Sept. 1 gives borrowers a few more months of breathing room before they have to resume payments. However, that doesn’t mean you should keep skipping payments during the moratorium if you can afford to make them.
The wisest move from a financial standpoint is to start paying down your student debt ASAP — as long as you have your other financial goals in order, such as establishing an emergency savings account and paying down other, higher-interest debt.
If those items are checked off, it makes sense to put your money toward paying off your federal student loans. One of the main reasons is that while the moratorium is in place, you won’t have to pay any interest on the loan. This means your money will go straight toward the principal, letting you pay the loan off faster and save money on interest.
Paying off your student loan now, while the moratorium is still in place, also means you know your money is going toward something that will ultimately put you in a stronger financial position. As Bloomberg reported, behavioral research shows that when someone has extra money lying around, they tend to spend at least part of it instead of putting it toward savings or debt reduction.
According to one study, student loan borrowers were more likely than others to have taken out a first mortgage while federal student loan payments were paused. But when the payments resume on Sept. 1, student loan borrowers might find their budgets stretched to the limit — especially with inflation running at 40-year highs. Using your available money to pay down the debt now can help you avoid this problem.
If nothing else, you should think about putting your available money into interest-bearing accounts instead of spending it. When student loan payments resume, that money will still be available — and you’ll have a little extra thanks to the interest you earned.
And if you are thinking it’s best to hold off on student loan payments because of talk that the government might ultimately forgive student debt, that’s a risky strategy. As GOBankingRates previously reported, President Joe Biden did not include student loan forgiveness in his $5.8 billion budget proposal, and even if he did, it is unlikely he would have enough support in Congress to pass such a measure.
There has also been talk that Biden could use his executive powers to forgive $10,000 per federal student loan borrower. But as Bloomberg pointed out, it’s not clear that Biden has the authority to cancel student debt through executive action. What’s more, erasing $10,000 would still leave most borrowers with a lot of student debt, considering that the average amount of student debt is about $30,000.
More From GOBankingRates