(Bloomberg Opinion) -- In March 2020, the federal government put federal student loans into administrative forbearance, suspending loan payments and temporarily lowering interest rates to 0%. This provided significant relief to millions of Americans who were able to redirect those payments to other pressing financial concerns amidst rising unemployment and furloughs.
It also prompted a lot of borrowers to ask whether they should take advantage of zero rates and pay off their student loans. After all, every payment would be applied directly to the principal balance, resulting in faster debt repayment. And the suspension of monthly payments and the 0% interest rates will currently expire December 31, 2020.
It’s a tantalizing prospect to spend these next months putting as much as you possibly can toward paying off your loans. But is it the right move? Well, like the answer to all personal finance questions, it depends.
Before discussing who should take advantage of administrative forbearance, it’s critical to make one thing abundantly clear: It only applies to federal student loans. Private student loans are not given the same treatment. However, you can call your private lender and discuss whether or not there is a forbearance option available to you. Even if there is a chance for forbearance, it’s unlikely you’ll receive the same 0% sweetheart deal the government is offering. Those with private student loans will need to continue making payments, unless you’ve discussed a forbearance option with your lender.
If you do have federal loans, you should focus on shoring up your cash reserves before paying off debts. Right now, we’re living with so much uncertainty. There is no timeline of when any version of normalcy will resume and when heavily impacted industries like entertainment, hospitality, food services and travel will completely return. Additional support in the form of boosted unemployment benefits or another stimulus check continues to be an unknown.
First, it’s important to know your bare-essentials budget, or how much you would need in a month just to meet your most basic and most-essential needs. These items vary but often include housing, food, medicine/health care, utilities, child care, transportation and debt payments. Once you know how much you’d need in a pinch, you can also determine how much cash you want to have in say a six-months emergency savings fund. If your current income is enough to cover your essentials, put those would-be student loan payments into savings.
Although it can be tempting to put money toward debt right now — especially if you’re getting messaging that it’s the prudent thing to do while rates are at 0% — it’s important to consider that debt repayments won’t be refunded. Should an emergency arise next month, you can’t call up your lender and ask for the student loan payment you didn’t need to make to be returned in order to pay for the unexpected expense.
If your emergency savings has remains untouched during the pandemic and you have a steady income, student loan repayment still might not be the right move. Instead, consider paying off other debts at higher interest rates — especially credit cards. Many credit card companies have offered relief options during the pandemic, such as allowing for reduced payments, temporarily deferring payments, waiving penalty fees and reducing interests (but usually not to 0%). Redirecting your student loan payment towards aggressively paying off credit cards could be a better use of those funds in the current moment.
Of course, there are those for whom it makes sense to attack student loans right now. Those who have at least six months of emergency savings and are gainfully employed with minimal risk of being laid off or furloughed would be ideal candidates to aggressively attack student loans during administrative forbearance.
The government may ultimately extend forbearance beyond December 31, 2020 — but it’s not a guarantee. Should you be in a situation right now where saving isn’t a conceivable option, you’re far from alone. During this time of relief on student loans, it’s critical to be proactively having the hard conversations with other lenders, landlords, and loved ones about next steps to evaluate all possible choices available to you.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Erin Lowry is the author of “Broke Millennial,” “Broke Millennial Takes On Investing” and the forthcoming “Broke Millennial Talks Money: Stories, Scripts and Advice to Navigate Awkward Financial Conversations.”
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