Taking Advantage of the New Student Loan Freeze
January 3, 2022 | By David Lowe
The Biden administration has announced it is extending the pause on federal student loan payments until May 1, 2022. If you have federal student loans, how can you take advantage of this relief measure?
- Add to your emergency fund. It is essential to have several months’ worth of living expenses saved in an account that gives you quick access to your funds without a withdrawal penalty. While federal student loan payments are paused, take the amount you would have owed the government, and put it into a high-yield savings account. (We often recommend MaxMyInterest.) Updating your autodraft amount can be an easy way to make the extra savings feel painless.
- Pay off high-interest debt. Credit card debt and other consumer debt often carry much higher interest rates than federal student loans do. Plus, the interest on consumer debt does not allow a tax deduction, as student loan debt does. The next few months are a great time to take the amount you would have had to spend on federal student loans, and instead pay off some high-interest consumer debt.
- Where to start? Paying off the loans with the highest interest will save you the most money over the long term. On the other hand, paying off the smallest balances first (often called the “snowball method“) can give you a real psychological boost. Quick “wins” of paying off debt provide great motivation to keep paying off other debt.
- Boost investments. With housing, kids’ expenses and student loans, it can be difficult for young families to contribute the maximum to their retirement accounts. While federal student loan payments are paused, the money you would have had to pay on college loans can go toward individual retirement accounts — or help you increase what you put into your retirement plan at work. Max out your contributions if you can. If that’s not feasible, remember that any amount of extra retirement savings will help you make progress toward your long-term goals!
- Another option – 529 plans. If you feel confident about your own retirement savings, you can put away a bit extra toward your kids’ 529 accounts (or other college savings) over the next few months. The more your family saves now, the less your kids will have to rely on student loans some day. You can help set them up for financial success when they are young adults just starting their careers and families.
- Prepare for loan payments to resume. While the temporary pause is nice, expect that federal student loan payments probably will resume before too long. Now is a great time to re-evaluate your budget. Trim expenses if needed to give you a bit of a cushion for when student loan payments resume in full.
- Need help evaluating your options? Contact your AWM advisor today to schedule a check-in call.
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