By Haley Tolitsky, CFP
On August 6th President Biden extended the current pause on student loan payments, interest and collections from the end of September to January 31, 2022, making it clear this will be the last extension. It may seem like you have plenty of time before needing to stress about repayment, however, it is crucial to plan now. If you’ve experienced job loss or a decrease in income, use the funds to pay your essential expenses, which is what this relief was established for. For others, here are 6 key steps you can take over the next few months to take advantage of 0% interest, prepare for the resumption of payments and get your finances in order.
Review Your Budget Now
The most important step you can take is to adjust your budget now to prepare for your monthly student loan payment(s). It has been over a year since you have had to make those payments, so get back into the habit by modifying your budget to include the loan payment and using those funds toward one of the recommendations below. This will make the transition back into paying your student loans a seamless one.
Build Your Emergency Fund
This is your starting point if you do not have at least 3-6 months of living expenses in a high-yield savings account. Having an adequate emergency fund prevents you from going into debt or further debt when an emergency arises. If saving 3-6 months is overwhelming, work to save up one month of expenses at a time. You can also establish another savings account for other financial goals you may have, such as a down payment on a house, wedding or vacation.
Pay Off High-Interest Debt
Once your savings are in place, use the extra funds to pay down debt that has a higher interest rate than your student loans, most likely credit card debt. This will not only reduce your overall debt, but also improve your credit score. Credit cards with no annual fees should be left open, since length of credit history is a factor in your credit score, as long as you are confident you will not build up a balance again.
Boost Your Retirement Savings
If you have no high-interest debt, first give yourself a pat on the back, and then, use these next few months to increase your retirement contributions, either through your workplace 401(k), IRA or Roth IRA. You could also consider opening a brokerage account to invest additional long-term funds that are not necessarily for retirement, but make sure you understand the tax implications for this specific type of account first.
Continue to Pay Down Student Loans or Other Low Interest Debt
Those who are debt-adverse can use this opportunity to pay down other debt you may have, such as a car loan or your student loans, since the payment will go entirely toward the principal. If you are planning to qualify for Public Service Loan Forgiveness (PSLF), it is not beneficial to make additional payments toward your student loans during this time, as these months still qualify toward forgiveness without any actual payments being made.
Understand Your Repayment Plan Options
Now is a great time to review your current repayment plan and determine if it is still the right fit for you. You may consider refinancing your loans with a private lender to consolidate and have a lower interest rate, switching to an income-driven repayment plan if you’ve experienced loss of income to lower your monthly payment or exploring the Public Service Loan Forgiveness program if you are employed by a government or not-for-profit organization. Every option has its benefits and drawbacks, so be sure to do your research before coming to a decision. Reach out to a financial planner if you need assistance selecting the right plan for you.
February will be here before we know it, so review your finances and get prepared now!
About the author: Haley Tolitsky, CFP®
Haley Tolitsky, CFP® is a CERTIFIED FINANCIAL PLANNER™ with Cooke Capital in Wilmington, NC, providing highly personalized financial planning and investment management services. She is passionate about financial empowerment, specifically for women and the next generation, and loves the opportunity to motivate and guide others to take charge of their financial lives. Haley can be reached at email@example.com.
Securities offered through The Strategic Financial Alliance, Inc. (SFA), Member FINRA, SIPC. Advisory services offered through Allegiance Financial Group Advisory Services, LLC (AFGAS). SFA, AFGAS, and Cooke Capital, Inc. are not affiliated. Supervising office 703-242-7900.
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