Why You Should Continue Paying Student Loans During the Pause

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  • The Biden administration has extended the student loan repayment pause into 2023.
  • You don’t have to make payments on your loans during the pause, but doing so will save you money.
  • Student loan forgiveness is being challenged in courts and isn’t guaranteed. Make a plan to repay.

With the Biden administration’s student loan forgiveness plan tied up in the courts, the government is again extending the repayment pause that’s been in effect since March 2020. But for many borrowers, the smart move would be to make payments anyway.

Biden’s plan is to forgive $10,000 in student loans for single borrowers who make $125,000 or less and married couples and heads of households who make less than $250,000. The amount of forgiveness will be $20,000 for Pell Grant recipients. While the latest pause could mean you won’t have to make payments until late August 2023, making payments on balances exceeding the forgiveness amount in the meantime can save you a lot of money.

“If you have student loans, you should start paying them down, but consider leaving that last $10,000 or $20,000 until the court cases work themselves out,” said Jay Zigmont, a CFP® professional and founder of Childfree Wealth. “The bonus of paying your loans now is that the entire payment is going to the principal. If you are down to your last $10,000 of loans, consider putting the payment into a savings account that can either be used or put toward the loan once we have an answer on forgiveness.”

The Department of Education said student loan payments will resume either 60 days after the lawsuits challenging it are resolved or, if they have not been resolved by June 30, then 60 days after that. 

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Why should I make student loan payments now?

Typically, when you make payments on loans, you’re not only paying down the balance of your debt but also the interest on your principal. This can occasionally lead to borrowers who make on-time payments actually having their loan balances go up because their payments only cover a portion of interest and don’t reduce the principal at all.

If you make student loan payments during the pause, all the money goes toward reducing the principal. This will help you reduce your debt more quickly than when you’re in a regular repayment period because you’ll be paying interest on a smaller amount of debt when payments resume. That means you’ll pay less in interest overall than if you made no payments during this period. 

Student loan repayment example

For example, say you had an initial loan balance of $30,000. Here’s how much you could have saved had you continued to make regular student loan payments throughout the duration of the repayment pause.

To calculate savings, we’re using a fixed interest rate of 5% and the average student loan debt for borrowers. This works out to a monthly payment of $318. For simpler calculations, we’ve assumed a repayment pause of three years, which would take us to March 2023. 

If you had continued to make your regular monthly payments for those three years, you would have saved more than $3,000 over the life of your loan.

Now, if you haven’t been making payments but want to start, here’s an example of how much you can still potentially save from now until the end of August.

While it might not seem like much, $781 in savings is still significant if you can work student loan payments back into your budget.

“When student loan payments start again, many are in for a rough time,” Zigmont said. “Start now by making $50 or $100 monthly payments towards your student loans. Increase the amount each month, and you will not only make space in your budget but also make progress towards paying down your loans.”

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