Student Loans are Paused—Should You Keep Paying?

Millions of Americans have their student loan payments put on pause. What does this mean for you, and how should you respond to it? Stick around. 

If you have any federal student loans, you know by now that your payments have been paused for almost a year now, and they’ll continue their pause until September 30, 2021 (at least). With the average student loan payment ringing in at a chunky $393/month, for many borrowers, this means more of your money could be staying in your pocket for the next eight months.

How were you impacted by the student loan freeze? We want to hear from you in our short survey!

For the person paying nearly $400/month in federal student loans, that means you could be holding on to $3,184 more dollars than you are right now come fall. And to sweeten the pot further, throw in the $600 stimulus (per person), and a tax return (average return in 2019 was $2,535). Let’s quickly recap:

• Student loan pause: $3,000
• Stimulus: $600 per person
• Tax return: average of $2,500
• Total: ~$6,100+ between now and September 30.

Another way to look at it: many people are rounding the corner on the biggest pile of cash many have seen in their career thus far.

And it begs the question: what should you actually do with that extra money while your loan is deferred? We’ll get to that. But first, let’s give a quick recap of what actually happened.

Many people are rounding the corner on the biggest pile of cash many have seen in their career thus far.

Q&A: Student Loan Deferment

Wait, what happened?

Federal student loan payments will continue to be automatically paused at least until September 30, 2021. No interest will accrue. 

Does this mean my student loans are forgiven between now and September 30?

Nope. This is a pause, not a forgiveness. You still have to pay your student loan back, but it won’t accrue additional interest during this time. If you haven’t been making payments, you’ll pick right up where you left off with your balance before the pause went into effect in 2020. 

Does this apply to all my loans?

No. If you have private loans, this pause does not apply to those loans and you’ll still be making those payments. Since this recent order is just a continuation of the initial freeze in 2020, the eligible loans have already been automatically paused.

Wondering if your loans qualify? Check out this resource.

Do I have to do anything to make this happen?

Nope. Payments were paused automatically on federal loans in 2020, and this will just keep going.

Can I still make payments?

Yes. 

Should I still make payments?

We’ll get to that.

What if I’m pursuing Public Service Loan Forgiveness?

This part is kind of magical. For those pursuing public service loan forgiveness, you don’t need to make payments until payments start up again, but these “pause” months still count toward the 120 payments needed to qualify as long as you’re still working full-time for an eligible employer. What a gift, what a gift!

My Student Loans are Paused, Now What?

This feels like a golden opportunity, a year of jubilee, a celebration—but you’re not quite sure how you can make the best of it. You might be asking:

• Should I keep paying off student loans?
• Should I pay off other debt?
• Should I save the money?
• Should I take a vacation?
• Should I buy this eight-foot long gummy snake because I'm $400 richer this month (it’s only $120!)?

You’ve probably waffled through all of those thoughts 52 times over by this point. So which route is best?

This is your chance to intentionally prioritize your money. Have you done that before? It might feel foreign at first. Let’s practice with a few questions:

1. Is Your Margin Threadbare Right Now? 

Are you struggling to pay rent? Put food on the table? Your priority is so obvious we don’t even have to tell you. You know where this money is going right now! 

Priority: Essentials

Put that food on the table. Pay for rent this month. 

2. Is Your Margin Thin Like a Sleeping Pad? 

Maybe food is on the table (fried egg+ramen for the win), rent is paid, but your toes are scootched out over the financial edge and you’re one flat tire away from a tailspin. 

Priority: Emergency Fund

Your best move might be to sock that extra money away in savings. 

In fewer than three months, you’ll have over $1,000 set aside for those rainy days that will inevitably come. You’ll be ready with umbrella in hand.

What This Looks Like in Action:

Let’s say your student loan payment was $350 a month. 

• Set up an automatic transfer of that amount from checking to savings. 
• Or use digital envelopes to earmark your emergency fund in a budgeting app like YNAB. 

3. Is Your Margin Lumpy Like a Futon? 

You might say things aren’t terrible, but you’re not exactly comfortable either. Month to month expenses are totally fine: it’s the twice-a-year car insurance that really throws you for a loop. And let’s not even get started on holiday spending...you’re still reeling from that one.

Let’s say a month of your life costs $3,000 between your rent payment, groceries, bills, and overall “life expenses.” Your checking account currently has exactly $3,000. At the end of the month—you’ve burned through $2,985 of this money for your regular life expenses, and you are counting the minutes and hours until payday arrives.

Next month happens. Second verse, same as the first. A little bit louder and then a whole lot worse. You start the month with your first paycheck, then your second paycheck. Day 28 rolls past and your bank account is at $120. And then your car breaks down and needs a $300 repair. The angst! The stress! Sound familiar?

Priority: Build Up Your Reserves

This influx of cash could be the moment you switch from the paycheck to paycheck strain for good. 

What This Looks Like in Action:

Let’s rework that money mindset you’ve got going on right now. Instead of running your life at the $3,000/month baseline after tallying your food, rent, bills, and life...I want you to bake in those “surprises” that aren’t actually surprises:

• Your twice-a-year car insurance
• Your once-a-year Amazon Prime bill
• Car repairs
• Christmas 

Now, you see your life actually costs closer to, say, $3,500/month. Take that extra money, let it sit around in your account so you can get a month ahead.

Three months from now, you start the beginning of the month with $7,000 in your account instead of the usual $3,000. When the end of the month rolls around, instead of having single digits left in your bank account (and crossing your fingers for no overdraft fees), you have a healthy balance of $3,500 still left. 

The month rolls over, your paychecks keep coming in, and your account stays steady, never dipping below $3500 or so.

You’re a month ahead. You can keep this loop going from here on out! And just like that, you’ve broken the paycheck to paycheck cycle.

4. Is Your Margin Like a Mattress With a Broken Spring? 

You might have a very specific pain in your financial side. Maybe it’s a credit card balance that’s eating your bank account alive. Maybe it’s an outstanding loan to a family member whose eyes bore into you every time you buy a coffee. 

Priority: Fix the Trouble Spot

Consider using that freed-up cash to blast away your balance into oblivion. 

• Pay off that credit card debt! (The average credit card debt sits at $6,194—you could finally be free!) 
• Start paying back that loan to your family member and feel instantly more at ease.

If Student Loans Are Your Trouble Spot…

If you’re so close to your student loan being completely gone and you’re just chomping at the bit—there’s absolutely nothing wrong with paying if off once and for all!

But after consulting with many a wise sage, we have this thought to suggest:

Try This: Make the Payments...to Yourself. Decide in September

Send those regular payments into a savings account to build up. When September rolls around and you’re looking at a couple thousand dollars, you get to decide if they should go toward your student loan slaying...or something else! It puts the power in your pocket, the dollars in your pocket, and the decision might hit differently eight months from now.

Learn more about debt payoff in our totally free, don’t-have-to-sign-up-for-anything video course. You can knock the whole thing out in a little over an hour. Check it out:

5. Is Your Margin Comfortable Like a Pillowtop Mattress?

But let’s say you’re not struggling, you’ve got a good buffer, and you’re not plagued with other debts. Here’s the really fun question: 

What goal do I want to pursue? 

There’s no wrong answer here. 

• If you want to get 2, 3, 4, 5, 6 months of expenses in the bank, great. 
• Want to take advantage of compound interest and invest in retirement? Cool. Cya on the golf course.
• Dreaming of a house and want to save up for a down payment? Go get it.
• Ready to adopt a dog? Send pics.

It’s really up to you. 

But remember… this isn’t forever. Maybe student loans will get cancelled, but there’s a real good chance they won’t. 

Think of this as halftime. You’ve been wrestling with these student loans, and now, you get a chance to take a break. But that doesn’t mean you start gorging pizza and settling down for a nap. You catch your breath, swig some gatorade, and figure out your game plan going into the second half. 

This student loan freeze could just be a chance to loosen your belt, or it could be the reset that finally helps you get real control over your money and your goals. We’ve laid out a few game plans, so you figure out which one works best for you, and we’ll see you in the second half. 

Want help getting intentional about your money? Get clarity on your monthly expenses, get a month ahead, and build a cash cushion with the help of the digital envelope budgeting app You Need a Budget. Try it free for 34 days.