How to take advantage of a student loan payment freeze

During the student loan payment and interest freeze, if you are able to make payments now, you’ll have a much greater impact on your loans.

A lot of the benefits that were passed to ease the crisis for people dealing with the pandemic have expired.

The extra money for unemployment benefits, gone. The eviction moratorium? Gone, at least on the federal level.

But there’s one benefit that’s still right out there in front of you. And unlike, say, those extra unemployment benefits, you can still take full advantage of this right now, even if you hadn’t known about it or planned to do anything about it until now.

I’m referring to the student loan payment and interest freeze.

You’ve got a big opportunity here.

A little background

Back in March, when we all seemed to care about the recovery and helping people who were negatively impacted, Congress passed the CARES Act. This act was sweeping, and is responsible for most of the benefits you’re heard about over during the course of the pandemic.

But I want to talk about what the act did for those who hold student loans.

For a period of about six months, from March to the end of September, requirements on payment for student loans were suspended. Also, interest collection on student loans were also suspended. (Read more details on which loans do and do not qualify.)

Basically, if you have student loans, you can just ignore them for those six months, and you won’t be negatively impacted at all.

Now, if you’re experiencing severe financial hardship, and I know a lot of you are, it makes a lot of sense to take this reprieve from payment and use what money you have to pay for more important necessities. These are things like housing, food, utilities, transportation, things that are essential for getting through your day-to-day.

But it’s also possible that you’re still working during this time, still earning income, and that your financial picture hasn’t changed all that much, apart from a lot more time spent on Zoom.

If this sounds like you, then you have a huge opportunity here.

What 0% interest rates look like

Let’s talk about Rand, who has $35,000 in student loans, and set at 5% interest. I use that $35,000 amount in this example, because it’s approximately what the average student loan holder holds.

Now, in normal times, Rand, who has 10 years left on his loan, would pay about $371 per month, for a grand total of $44,548 over that timeframe.

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Here’s a chart showing Rand’s balance over time, paying that amount:

Figure 1: Student loan payments in normal times

Now, if Rand were to do nothing over this six months of payment and interest freeze, not much would really happen. Everything would get shifted back by six months. He’d pay the same amount, and be done in 12 1/2 years instead of 12.

Figure 2: Student loan payments with six months of payment and interest freeze

But here’s where it gets cool. If Rand were to make normal payments during this six month interest freeze, the same amount is he would normally do, he would end up paying his loans off five months quicker, and only pay $43,172 in total.

In short, by paying normally, he’d save almost $1,500 dollars, and five months.

Figure 3: Student loan payment, still paying normally during the freeze

See how much difference paying sooner rather than later makes?

I hear what you’re saying. “Yeah, that’s great, but I didn’t do that back in March. I’ve been paying nothing this whole time. Am I out of luck to take advantage of this time?

Not at all! Because since the payments and interest are still zero during this whole six month period, it doesn’t matter when you post payments. You could post the same amount in April or in May, or in September, and the results would be the same.

So if you have the money to pay for all six months tomorrow, the result would be the same as above! So, there’s still time.

The big payoff

But wait, it gets better. If you’re able to pay a lump sum to your student loans (and I obviously understand that not everyone can, but again I’m speaking to the people who still have income) you have a golden opportunity here.

Let’s say Rand has $5,000 in savings that he can put toward student loans. What would it be like if he did that today?

If he did that lump sum once, and then paid normally for the rest of the duration of his loan, we would pay off his loan almost a year and a half faster. Not only that, he would end up paying a grand total of $41,653, a cool $3,000 less than if he would have done nothing.

And it wouldn’t matter if he were to do this on March 30th or September 30th.

Figure 4: Student loan payoff with large payment during the freeze

Bottom line

You can get the same, or similar benefits by paying into your student loan balance now, or at any time before September 30th, when interest rates most likely go back up to what they were.

I can’t remember the last time that interest rates on student loans were artificially set to zero for such a long time for so many people. And I wouldn’t expect an extension.

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Whether you act today or September 30th, the end result is the same: the more you can put away to your student loans, the less you will end up paying, and the sooner you will be rid of your loans.

Yes, it is possible. I paid off mine, and you can pay off yours.

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