As many people already know, the federal government has frozen federal student loan payments to deal with the ongoing COVID-19 pandemic. In addition, qualifying loans will not accrue interest until later this year. Although only certain types of borrowers are entitled to stop making payments, money saved from the student loan freeze can be devoted to a variety of purposes.
Pay Down Other Debt
Perhaps the most practical thing you can do with money saved from the student loan freeze is to pay down other debt. Individuals unfortunately have all kinds of loans in addition to student loan debt. This includes car loans, credit card debt, and other financial obligations. Such debt generally has different interest rates and repayment plans, and in many instances, the interest rates on this debt can be higher than on most student loans.
If you have high-interest credit card debt, for instance, it might make sense to pay this down with money saved from the student loan freeze. This could be a perfect chance to eliminate one financial vacuum in your life that has been more difficult to manage since student loan payments needed to be made. If you have a high-interest payday loan, it might also make sense to completely pay this off with money you’ve saved. However, it is more difficult to determine if it makes sense to pay off car loans or other debt with more reasonable interest rates. Generally, the monthly payment amount, interest rates, and other factors will influence if these loans should be paid off immediately.
Down Payments for Homes
One of the most practical things you can do with money saved from the student loan freeze is to save money to purchase a home. Sometimes, if you have really high-interest student loans, it might not make sense to devote money to buying a home over student loans. However, buying a home may make sense in the current environment.
Mortgage interest rates are presently at historic lows so that people have access to capital which can stimulate the economy. Many borrowers may wish to take advantage of the low interest rates since it is possible that interest rates will rise over the next year or so. Moreover, in certain circumstances, renting can waste money that may be used to pay down the principal of a mortgage. Since student loan interest is frozen in place, there are few disadvantages to devoting financial resources to purchase a home and this may make sense in many situations.
Buy a Car
Money saved from the student loan freeze can also be used to buy a car. My parents used to say that cars are like “money pits” and drivers often spend substantial amounts of money on gas, maintenance, and other expenses associated with a car. However, some people need to have a car because many rural and suburban areas do not have adequate public transportation.
I currently lease a car, and the experience has shown me that buying is advantageous to leasing in a variety of circumstances. There are many hidden costs to leasing, and these expenses can easily add up to thousands of dollars. In addition, leasing is like renting a house in that you are paying for something of which you do not have ownership. After you pay off a car, you do not need to make any more car payments (except for insurance and the like) and this can impact the amount of money you have to spend each month. As such, if you need to have a car for your job or based on where you live, you should consider making a down payment or completely paying for the cost of a car with extra money from the student loan freeze.
Start a Business
In certain instances, money saved from the student loan freeze can be used to start a business. This website has already discussed how student debt made it extremely difficult for me to save enough cash to start a business of my own. It is true that individuals ordinarily need to put money down in order to start a business and have operating capital, and it can be difficult to save if student loan payments must be made each month.
However, many people are accumulating money right now because cash they would ordinarily devote to student loans can be retained. This could be the perfect opportunity to devote a substantial sum of money to opening a business. Of course, many student debt borrowers may be nervous about opening their own business because it is far from certain that businesses will succeed and that people will earn enough money from a business to live and pay off student loans. However, as I can attest to from firsthand experience, it does not take as much time to break even with a new business as you’d think and it can be very fulfilling to open a new business in many instances.
All told, we are living in unprecedent times, and the government has provided substantial assistance to student debt borrowers in the form of a student loan freeze. So long as students keep some considerations in mind, money saved from the student loan freeze can be used to create more financial stability or achieve life goals that are more difficult when you need to make monthly student loan payments.