Take Full Advantage
If you are receiving forbearance, but do not really need the money to get by day to day, you need to take full advantage of this. What you have is a golden opportunity to improve your financial picture in a number of different ways. Here are some examples.
Pay Off Your Student Loan Debt
This is one seemingly obvious way to use your money. You could simply keep making payments or even make extra payments to get that balance own. Without the burden of compound interest, you should be able to make a huge dent in your student loan debt. Every penny you pay will be going towards principal, so by the time payments return, you could knock years off of your student loan burden.
Of course, there is one problem to this that might make it a bad idea. That is the looming possibility of student loan forgiveness. The president is currently being urged to forgive up to 50,000 dollars in student loan debt. Will it happen? It is probably a long shot, but if loan forgiveness were to become a reality, you would be unlikely to get all of these extra payments back.
Tackle Your Credit Cards
Perhaps a better way to spend those student loan payments is on your credit card debt. You know for a fact that this debt is not going anywhere and, if you are like most Americans, you are carrying thousands of dollars in this high interest debt. In fact, according to CNBC, the average American is carrying 7000 dollars in credit card debt. With the average credit card interest rate being over 17 percent and with many rates as high as 29 percent, this is a huge problem.
The best way to tackle this kind of debt is to have a plan. Two popular credit card debt reduction methods are the Debt Snowball method and the Debt Avalanche method. Take a look.
With this method, you start small, just like when you make a snowball. Take all of your cards and organize them by balance. Pay the minimum on all cards but the one with the lowest balance. On the lowest balance card, apply all of the money that you were spending on student loans and more if you can. When that card is paid off, move on to the next lowest balance one.
The benefit to the Debt Snowball method is that it motivates you. It can be very frustrating paying down a high balance card, never seeing a real reward. By focusing on the low balance cards, you see the reward of a paid off card much quicker.
Do you have a more analytical mind? If so, you might enjoy this method more. With this method, you organize your card by interest rate. You then pay down the card with the highest interest first. When that card is paid off, you move on to the card with the next highest interest rate.
The Debt Avalanche method has the benefit of using your money in the wisest way. By paying off the highest interest debt first, you maximize your money and will pay your debt down faster.
Build Up Your Emergency Savings
If this pandemic has taught us anything it is that we need to be prepared. Hopefully, you have an emergency savings already and you can use your student loan forbearance to shore it up. Don’t have an emergency savings? Let’s take this opportunity to fix that.
Starting To Save
The first step when forming an emergency savings is to open up a savings account. Simple enough, but you need to be careful where you open it. It would be easy to simply open an account where you already bank, but that would make the money too accessible. You want to be able to reach your money, but not instantly. That is why an online savings is the best bet.
With an online savings, it takes about one business day to transfer money. That gives you time to cool off and not make rash decisions with your money. In addition, most online accounts pay 10 times the interest that local banks do. It still might be only 1 to 2 percent, but every dollar counts.
Once you have your account, simply divert the student loan payments that you are not making into it. If you have a 300 dollar loan payment, you could put nearly 2000 dollars in your savings in just 6 months. Don’t stop there though, keep contributing until you have at least 6 months of expenses saved up. Once you reach that level, keep saving but start contributing to an investment account instead.
Ideally, you should be saving 10 percent of your take home pay. Hopefully, your differed student loan payments help you do that, but try to find a way to continue saving after the deferral period begins. This might mean making some tough budget choices, but saving is important to your overall financial health.