Only pay down student debt during repayment pause after you do this first, says Student Loan Planner founder

"If interest rates are 0%, you could put the money in the bank and earn interest instead."


The White House has extended the payment pause on most federal student loans until May 1, 2022, in response to concerns about the rapidly spreading omicron variant.

Since March 2020, federal student loan borrowers have not needed to make payments on their loans, and the interest rate on those debts has been temporarily set to zero. Borrowers who were supposed to restart loan payments as of January 31 now have a little more time to breathe and budget, the Biden administration announced December 22.

While it's tempting to use extra cash to make headway on that student debt during the forbearance period, it may be smarter to put your money to work in other ways, says Travis Hornsby, a chartered financial analyst and founder of financial advisory firm Student Loan Planner.

"If [student debt] interest rates are 0%, you could put the money in the bank and earn interest instead," Hornsby says. Or there are even more valuable moves: "You could also increase your retirement savings, start contributing regularly to a brokerage account, pay down any short-term debt you have, or fully fund your emergency savings fund."

During the forbearance period, "I would do all those things first, then use extra funds to make payments on student loans you plan to pay off," Hornsby says.

Here are three more things to know about managing your student debt during the pause, according to Hornsby and other experts.

Student loan cancellation could be worth waiting for

One risk of paying down your loan balance during the pause is the possibility of student loan cancellation, which consumer advocates and some lawmakers have been pushing for. "As we look to 2022, we see the momentum is on our side, which is why we feel very strongly we can continue to push and secure debt cancellation for a large amount of Americans," says Cody Hounanian, executive director at the Student Debt Crisis Center.

Continuing payments now when you aren't required to could reduce the value of that forgiveness. "If a borrower made payments during the payment pause, or before, and then [the government] decided to forgive federal student loan debt, they're most likely going to forgive based on the current balance, not the previous balance," says education expert Mark Kantrowitz.

Senate Majority Leader Chuck Schumer and other Democratic lawmakers have called on the Biden administration to cancel $50,000 in student loan debt per borrower.

When Biden was running for president, he pledged to forgive "a minimum" of $10,000 in student-loan debt per person. But since taking office, Biden has been exploring his options. Instead of taking executive action on canceling student debt, Biden says he would prefer Congress craft the legislation.

Take steps to 'make it easier to start making those payments'

Nearly 90% of borrowers say they are not financially secure enough to resume payments, according to a recent Student Debt Crisis Center survey. The nonprofit sent the survey to 2 million people who follow its activities, and received 33,703 responses.

So it is important to make sure you're taking steps to financially prepare for the pause to end. If you can, "save the money that you otherwise would be spending on payments the next three months to build a cushion to make it easier to start making those payments in May," Kantrowitz recently told Grow. Kantrowitz also suggests creating a "simple descriptive budget," to prepare yourself for monthly payments to restart.

Payments can cut interest over the life of the loan

If you've ticked off many other financial to-dos, like building an emergency fund and saving for retirement, then, as Hornsby points out, making payments now on your student debt could be worth considering. And doing so would help you save money.

That's because if you do continue making payments while rates are set to zero, the full amount of your payment will be applied to the principal balance of your loan once all of the interest accrued prior to March 13, 2020, is paid. Reducing your principal in turn reduces the amount of interest you'll pay over the lifetime of the loan.

Just make sure that by doing so, you aren't passing up an opportunity to make a bigger financial improvement. Those who haven't had to pay during the pause have benefited tremendously, Hounanian says.

"We're hearing from borrowers that over the last few years when they've had their payments paused, they've been able to not only weather the pandemic, they've been able to purchase a home, invest in their family, save for retirement, do all of these things they have not been able to do because of student loan debt," he says.

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