6 ways to use your money now that student loan forbearance is extended until May

  • The federal government recently extended student loan forbearance until May 1, 2022.
  • You may want to continue paying off your student debt, even if you don’t need it.
  • You might also consider putting money into your emergency fund or saving for retirement.
  • Learn more about Insider’s student loan coverage here.

The Biden administration announced this week that the government’s coronavirus-related forbearance on federal student loans will be extended through May 1, 2022. The pause comes amid ongoing concerns about the coronavirus pandemic and rising the Omicron variant. Student loan repayments have been suspended since March 2020.

For borrowers who weren’t ready to resume payments at the end of January, when payments were previously set to restart, the news is a welcome relief. Now that you have three more months before you need to start paying off your student loans, you have several options for making the most of your extra time.

1. Keep paying off your student loans

You may want to continue paying off your student loan if your finances are still in good shape.

Usually, when you repay your loans, you have to pay the loan principal and interest. Since you will not be charged interest for the next few months, your payments will be used entirely for the principle of the loan. This could be a golden opportunity to pay off your balance faster and pay less total interest over the life of the loan.

You will also develop the good habit of making regular payments. This habit can help you avoid late or missed payments, which can hurt your credit score.

2. Contribute to a high-yield savings account with a lump sum payment

With a High Yield Savings Account, you can keep your money safe with a guaranteed rate of return. Most of the best high-yield savings accounts today pay an interest rate of around 0.50%, compounded daily and paid monthly.

You can set up an account to save for your student loan debt and set aside a certain amount from each paycheck. If you have a high-yield savings account with savings buckets, like the one with Ally, you can create a target goal with the amount you want to save within a set time frame.

Using a high-yield savings account can be more beneficial than just making monthly payments because your money can grow and you can withdraw it if you need money in an emergency. You will also be able to use the interest earned on your debt, although this amount earned is probably not particularly high.

Your money will slowly increase with each contribution and will be easily accessible. When payments resume in May, you will be able to take the money you have deposited into the account and make a lump sum payment for your student loans.

3. Pay off high-interest debt

The pause on student loan repayments can give you the flexibility to pay off high-interest debt like credit cards and personal loans that can sometimes carry an APR of over 30%. These interest rates are often higher than student loan rates, so focusing on those can help you save money.

Take stock of your debt and consider trying debt avalanche or debt snowball strategies. The debt avalanche strategy focuses on paying off your highest debt balance first, while the debt snowball strategy focuses on paying off the smaller balances first.

4. Build an emergency fund

An emergency fund provides a safety net for unexpected expenses, such as home and car repairs, medical bills, and broken electronics. It can also protect you if you lose your job. An emergency fund usually covers between three and six months of expenses.

If you don’t have an emergency fund or it’s smaller than you’d like, now may be the time to add to it. Instead of making monthly contributions to your student loans, you can divert the money you were going to pay—at least your minimum monthly loan payment—to your emergency fund.

By the time student loan repayments begin again, you’ll have a nest egg in place to protect you from financial emergencies.

5. Put money aside for retirement

If you’ve built up an emergency fund and you’re happy with how much you’re contributing to your student debt, you might want to start putting money aside for your retirement. The earlier you save for retirement, the more time your money has to grow.

You can put money into an employer-sponsored 401(k), and often they’ll match your contributions up to a certain percentage, which is essentially “free money.” You can also choose to put your money in a Roth IRA or a traditional IRA.

6. Invest in the market

Make sure all your other financial goals are in order before prioritizing investments. Investments are not guaranteed by the FDIC, so it is possible to lose money in the market.

It’s the riskiest choice of all the options we’ve listed, but it also has the potential for the highest rate of return on your money. If you’re a beginner and want to learn how to invest in stocks outside of your retirement accounts, check out our guide.

Extending student loan forbearance for several additional months buys you time to move forward on your loan payments or to build a safety net elsewhere. Prioritize your financial goals and invest in those that matter most to you.

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