The CARES Act gave automatic forbearance to your federal student loan debt. Here are 12 ways to spend this money wisely.
- Due to the changes in legislation outlined below and the proposed forgiveness of federal student loans and Pell grants, the initial list of 15 ways has been reduced to 12 ways to use the student loan payment relief.
UPDATED – November 22, 2022
The Education Department announced on November 22, 2022, “Payments will resume 60 days after the Department is permitted to implement the program or the litigation is resolved, which will give the Supreme Court an opportunity to resolve the case during its current Term. If the program has not been implemented and the litigation has not been resolved by June 30, 2023 – payments will resume 60 days after that.”
BACKGROUND
The CARES Act Federal Student Loan Relief
The Coronavirus Aid, Relief, and Economic Security (CARES) Act has provided temporary student loan relief for federally held student loans. Federal loans typically have the word “Direct” in them, such as Direct Unsubsidized Stafford, Direct Subsidized Stafford, and Direct Plus.
Here are the details:
- No payments for 6 months. You will not have to make payments on your federally held student loans for six months (through September 30, 2020). Update: Now to August 31, 2023, if the legislation is not resolved before June 30, 2023.
- No interest will accrue. The interest rate on your federally held student loans was reduced to 0%, effective March 13, 2020, through September 30, 2020. Update: Now to August 31, 2023, if the legislation is not resolved before June 30, 2023.
- Suspended Payments Count Towards PSLF. Non-payments under the CARES Act count as though they had been made before the crisis. So the CARES Act provides a triple win for those seeking Public Service Loan Forgiveness (PSLF). Update: Non-payments under the November 22, 2022 announcement, referred to above, still qualify for PSLF.
Double-check with your loan service provider to make sure they have suspended your payments.
A LARGE SUM OF MONEY
The total amount of money saved by student loan relief in the next six months can add up to $2,000 or more.
1. Don’t Spend It Foolishly
You may think that the money from the student loan relief is money to spend freely. But make sure to avoid doing this. If someone asks how you spent this money you should be able to say exactly what you did with it!
COVER YOUR NEEDS
2. Pay For Your Rent, Utilities, or Food
The coronavirus stimulus is to assist those who lost their jobs or part of their income due to the pandemic. If this happens to you then use the student loan relief to pay for your rent, utilities, or for food. First, make sure you have money to feed yourself and your family. So you may have to spread the student loan relief money over various expenses.
3. Create an Emergency Fund
If you have zero to little savings this is a very good time to start an emergency fund. Take the student loan relief money and put it in an emergency fund bank account. To help you avoid spending your emergency fund set up an account that is not at the same bank as your other accounts. Also, consider an account that pays higher interest rates than a bank. Consider a Marcus account from Goldman Sacks for your emergency fund.
REDUCE DEBT
4. Pay Down Your Credit Card Debt
If you are carrying credit card debt this may be the best place to put the student loan relief money. Credit cards have the highest interest rates. Pick the card with the highest interest rate and apply the student loan relief money to this card.
SAVE FOR THE LONG-TERM
5. Increase Your 401k Contribution
An automatic way to save student loan relief money is to increase your 401k payroll deduction. If your student loan payment is $240 a month and you earn $8,000 a month you can increase your 401k payroll percentage by 3%. ($240 / $8,000 = 3%) Doing this for 6 months will put away money that can continue to grow for many years to come.
6. Contribute To A Traditional IRA
You can contribute up to $6,000 ($7,000 if you are over 50) to an IRA in 2020. You can deduct your contributions in total if you and your spouse don’t have a retirement plan at work. If either one of you is covered by a plan at work the deduction may be reduced or eliminated. See the following information from the IRS on IRA Contribution limits:
7. Contribute To A Roth IRA
You can contribute up to $6,000 ($7,000 if you are over 50) to a Roth IRA in 2020. You cannot deduct contributions from a Roth IRA. But, there are income limits to making a Roth contribution based on your filing status and income. See the following information from the IRS on Roth IRA Contribution Limits.
8. Increase Your HSA Contribution
If you are in a high deductible healthcare plan then you are eligible to put money away in a Healthcare Savings Account (HSA). An HSA is a great place to save as it offers 3 great benefits. First, you get a tax deduction for contributions. Second, the money grows tax-free and you can invest in stocks and bonds like in a retirement account. Lastly, money withdrawn to pay medical expenses is 100% tax-free. Unlike Flexible Spending Accounts (FSA) most employers let you adjust the amount you put in your HSA at any time.
SAVE IT FOR A MAJOR PURCHASE
9. Increase Your New Home Fund
Perhaps your goal is to buy your first home or move to another home. If so, then a new home saving account is a great place to put the student loan relief money. Make sure your new home savings are in a high-yield saving account that is not easy to access. Consider a Marcus account from Goldman Sacks for your new home fund.
10. A Down Payment On A New Car
If your car needs major repairs this may be a time to consider replacing it. Car inventories at dealerships are climbing and there will be incentives to get you to buy a car. I prefer loans over leases. Keep the length of the car loan to 36 or 48 months. If you need more than 48 months that then you most likely cannot afford the car.
11. A Necessary Home Repair or Improvement
If you are a homeowner you may want to put the student loan relief towards home repair or improvement. It won’t be enough for major home improvements like a new kitchen or bathroom. But it may help toward paying for items like replacing a heating or cooling system, a new roof, or new appliances.
TRAVEL AGAIN
12. Start A Vacation Fund
Hopefully soon, we will be able to travel freely in our country and around the world. There are going to be a lot of places we miss visiting and other places we always wanted to see. So transfer the student loan payments to a separate bank account to fund your next vacation.
Comments or Thoughts?
How do you plan to use the student loan relief? Any other good suggestions? If so please leave a comment below.
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