Gears icon with text, student loan payments

It’s big news for anyone carrying federal student loan debt: Many borrowers aren’t obligated to make payments through September 2021. The thought of extra cash in your pocket sounds great, but should you take advantage of this offer?

Student loan repayment during the pandemic

In March 2020, Congress passed the CARES Act, which included various types of federal financial relief to offset hardship caused by the COVID-19 pandemic. Part of this legislation involves allowing federal student loan borrowers to hit pause on their payments — officially called forbearance — without accruing additional interest.

This payment suspension is truly just a pause — it’s not debt forgiveness. That means you’re still responsible for making payments after September 2021. In addition, this suspension does not apply to private loan providers. You can find out if your loans qualify at studentaid.gov.

And while you might’ve heard a lot of buzz surrounding student loan forgiveness, nothing official has been approved by Congress.

Should you pause payments or continue paying off student loan debt?

The federal student loan payment pause is a welcome respite for many borrowers, but you should consider several factors before deciding to take advantage of it. For example, has your income taken a pandemic-related hit? What are your long-term financial goals? Are you trying to save for multiple goals? Do you have an emergency fund and retirement plan? Your answers can help you determine whether to pause or pay your student loan payments.

Consider pausing if:

  • You’re unemployed or furloughed. If your income stream has slowed or stopped, your payment money can be used for necessities until you get back on your feet.
  • You’re carrying high-interest credit card debt. Choosing between paying down your credit card balance and making your student loan payment? Consider applying your available funds to your credit card balance right now. Credit card debt is high-interest debt, which will likely end up costing you more than education debt in the long run.
  • You’re seeking public service loan forgiveness. As part of the public student loan forgiveness program, you must make 120 qualifying monthly payments while working full-time for a qualifying employer (among other stipulations). During this suspension, your monthly “non-payments” count toward the 120. And since you won’t owe income tax on the overall amount of student loan forgiveness you receive, there isn’t a compelling reason to make payments right now.
  • You have an income-driven repayment plan. These plans (which base the amount you owe on your income and family size) can lower your monthly payments to $0, so making a decision might be moot. However, while your “non-payments” during the suspension period count toward the required number of payments applicable to your plan, you’ll still end up paying income tax on the total amount of loan forgiveness you receive.
  • You can earn interest by saving the money that would typically go toward payments. If you can afford to make your monthly payments, you might choose to instead “save now, pay later” by putting those funds into an interest-earning savings account, like our Ally Bank Online Savings Account.

Consider continuing to pay if:

  • You’ve maintained a steady income throughout the crisis. Making regular payments will help keep you from getting in the habit of spending the “extra” money typically earmarked for loan payments. Payments will be required in the future, so if you don’t need the money now, it’s probably best to keep reducing your debt.
  • You want to pay off your balance sooner. The CARES Act also lowered the interest rate on education debt to 0%. If you’re able to make payments now, you can make them interest free and every dollar will go towards your outstanding balance.
  • You want to reduce the amount of interest you pay overall. With the interest rate at 0% during forbearance, any payment you make (even a partial one) will be applied to your loan’s principal. That means even when the interest rate rises, you’ll pay the new rate on a lower balance — reducing your total interest costs.

2 ways to continue making student loan payments

If you’ve decided it makes sense to keep up on your student loan payments, you may wonder how to best go about doing that, especially if your income has slowed a bit.

  • One way is to use your third stimulus check. You could be eligible for up to $1,400, which would make for a nice payment towards any education debt you have.
  • Another smart strategy that’s become popular during this time is to try the “save now, pay later” method and keep making student loan payments — to yourself. With the Buckets feature of our Ally Bank Online Savings Account, you could set aside your monthly student loan payments in a digital envelope, earning interest on your money. Then right before the suspension period ends, you can make a lump sum payment and still take advantage of the 0% interest.

Making the right decision about student loan relief

The education debt relief offered as part of the CARES Act comes at a time when many borrowers need assistance. If you need the extra help, don’t hesitate to take advantage during this time of forbearance. Or if you’re able to continue making your monthly payment, you can think of the temporary suspension as an opportunity to be smarter with your money.

Our Ally Bank Online Savings Account lets you make changes to your savings as your financial priorities change.

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