4 Ways To Pay Student Loans That Are in Forbearance In Corona Period
The recently launched CARES Act has brought in some much-needed relief for federal student loan borrowers.
Due to the ongoing COVID-19 pandemic, all federal student loans have been automatically placed in administrative forbearance for 6 months.
This allows you to temporarily stop making monthly payments until September 30, 2020. However, if you wish to, you can still make payments.
Keep reading to learn how you can pay off your student loans in forbearance during this coronavirus period.
The CARES Act
The US Department of Education (ED) office of the Federal Student Aid has been actively monitoring the COVID-19 outbreak and its impact on the economy and income sources.
On March 27, 2020, President Trump signed the CARES act, confirming it into law with an aim to provide relief for all federal student loan borrowers.
The interest has been temporarily set to 0% on all ongoing federal student loans for the period of March 13 to September 30, 2020. This interest rate applies to the below-listed types of federal student loans issued by the Department of Education:
- Federal Perkins Loans
- FFEL Program Loans (defaulted & non-defaulted)
- Direct Loans (defaulted & non-defaulted)
How To Pay Off The Loans Quicker During This Emergency
This is the right time to try and quickly clear off your loans by making timely payments.
Why? Well, there won’t be any interest charged during this period.
Hence, whatever you pay will be directly applied to the outstanding principal.
This will help you lower the principal quickly, and you’ll ultimately be paying less interest once the relief period is over.
Say for instance you owe $50,000 at 6%. Given there isn’t any interest charged during this period, you’ll be able to save almost $250 a month.
Keep reading to explore 4 ways to clear your student loans in forbearance.
Make The Usual Monthly Payments
If your income sources haven’t been drastically impacted by the pandemic, you should keep making the monthly payments as usual.
All auto-debit payments are temporarily paused during this period.
If you don’t want to pause it, contact the lender to opt-out of administrative forbearance to resume auto-debits.
Alternatively, you can also opt for a pause in auto-debits and make manual payments during the administrative forbearance period.
You can visit your lender’s website to make the payment online or get in touch with the lender for other accepted payment methods.
If you make payments during administrative forbearance, you might be able to pay your loan balance more quickly, because once you have paid all interest accrued before March 13, 2020, the total payment amount is applied to the principal.
Make Extra Payments
This isn’t for everyone, but if you have spare savings, it’s a good idea to make some extra payments above the normal amount.
All of these payments will ultimately lower your outstanding principal, thus helping you pay off the student loan quickly.
For instance, if your current loan balance is $45,000 at 6%, your monthly payment is $450.
If you can add an extra $100 per month, the total amount of $550 will directly be deducted from the principal. This means your outstanding principal balance will fall by $3,300 during these 6 months.
As you can see from this example, the more you can add to the ongoing payments, the quicker your outstanding amount decreases.
Accordingly, after 6 months of relief, you’ll be making regular payments with interest on a sum of $41,700. This will help you clear the debt quicker and save an immense amount of interest.
Invest In A High-Yield Savings Account
If you agree to pause the payment, you can use the funds to your advantage.
Try investing the sum in a high-yield savings account.
The money that you invest will earn you a better interest rate - as high as 1% APY compounded daily and paid to you on a monthly basis.
At the end of the administrative forbearance period, you can withdraw these funds and make one lump sum payment on your student loan account.
However, make sure to do this by September 30 as interest will start to accrue again after this period. All of this money will be applied to the principal, thus you’ll have the benefit of clearing off the debt sooner than the scheduled term.
Make Partial Payments
As long as you are in administrative forbearance, there isn’t a penalty for making a payment that is less than your usual monthly payment.
Any payment that you make during this period will ultimately be applied to the principal balance, so it is a win-win situation either way.
Please contact your lender as soon as possible to explore options, such as enrollments in an income-driven repayment program for reducing your payments and/or opting in for administrative forbearance if you wish to continue payments but are facing a financial crunch.
All of the aforementioned strategies will work for your benefit.
Plan your finances correctly, make use of the stimulus you’re receiving, and try chipping off as much as you can to make regular payments on your student loan account.
You can pause the payments if you want, but it won’t help you much other than the temporary relief.
The best bet is to get in touch with your lender to discuss the option that best suits you.