Written by Kristen Ahlenius
On August 8th President Trump extended the student loan administrative forbearance as a response to COVID-19 crisis. This extension provides forbearance through the end of the calendar year. In addition, loan interest rates will remain at 0%. If you’ve been financially impacted by the pandemic the temporary elimination of this obligation can provide the necessary flexibility during these “unprecedented times.” What if you can continue to make your payment, should you? There are a few borrowers who could benefit from making payments during the mandatory forbearance.
- Borrowers who have a fully funded emergency savings account
If you’ve maintained your income throughout the pandemic and you have adequate savings you could take advantage of the reduced interest rate. While interest rates are reduced to 0% payments made will be applied to principal. Maintaining your monthly payment will lead to less interest paid over the life of the loan.
- You have outstanding unpaid interest subject to capitalization
This isn’t as straightforward as point one. When interest accrues on an unsubsidized student loan the interest isn’t added to the principal until a triggering event. These events include, but are not limited to:
- The end of some deferments
- The end of a grace period
- Failure to certify income for an income driven repayment plan
If your loan was in good standing before the administrative forbearance interest will not capitalize when payments resume. However, if you were in a grace period prior to the administrative forbearance your interest will capitalize as it normally would. These months of deferment could allow a borrower to eliminate this outstanding interest prior to the commencement of payments.
*If you’re unsure whether your interest will capitalize please reach out to your loan servicer for guidance as they are the authority on your obligation.*
If neither of the aforementioned applies to you it’s likely in your best interest to apply the lack of payment to another obligation. If you don’t have adequate savings, use the payment to build your account. If you have a fully funded emergency savings account you consider temporarily increasing your 401k contributions, paying down another liability, or beginning to fund another savings goal.
Damian is the lead Financial Concierge on Your Money Line, the financial help line serving all Pete the Planner® Financial Wellness clients. Damian is a CERTIFIED FINANCIAL PLANNER™ professional and loves answering your money questions. Despite sharing a last name and sense of humor, Damian and Pete are not related.