- I paid off my private student loans before the coronavirus pandemic hit, but my husband and I are still paying down his federal loans.
- While I’d love to achieve debt freedom as soon as possible, we’ve decided not to make extra payments on his loans while payments and interest are paused under the CARES Act.
- We think it’s smarter to put that money into our emergency fund just in case we lose our income — we can always use it to make a lump-sum student loan payment down the road.
- We’re keeping the cash in a high-yield savings account in the meantime so we can earn some interest on our funds.
- See Business Insider’s picks for the best high-yield savings account »
I paid off my private student loans on February 10, just as the coronavirus was turning its course toward the United States.
It was a bittersweet day. I’ve made a lot of financial mistakes in my life, and I consider my student loans to be one of them. But on February 10, they were gone, and only one obstacle was left standing between me and sweet, sweet debt freedom: My husband’s federal student loans.
Then, everything changed in a flash. On March 27, the CARES Act was signed into law. It paused most federal student loan payments, and the interest rate on these loans was set to 0%. These changes will last until September 30.
No one could have planned this, and it’s a huge boon (albeit a temporary one) for millions of people still paying off their federal student loans. For us, it meant a huge financial strategy shift. Instead of throwing all our extra money into debt payoff, we instead are channeling it to our emergency fund. Here’s why.
There’s no benefit to paying down federal student loans right now
In normal times, it’s a good idea to pay down your debt. You’ll save on interest, and you’ll free up money in your budget.
But these aren’t normal times. Now that the interest rate is set to 0% and no payments are required, those benefits go temporarily out the window. The cost-benefit analysis has shifted more to the cost side of things than to the benefits side. In other words, making extra student loan payments right now isn’t smart.
In fact, the only real benefit of paying extra towards our loans now would be getting closer to debt freedom a little bit sooner. It’s not an insignificant consideration — as a former debt-freedom blogger, I hate debt with a passion — but for right now, our money can serve us better in other ways.
We’re building up our cash cushion
Before the coronavirus hit, we had a $10,000 emergency fund in place. However, we’ve since revisited our calculations and realized it’s not enough since we’ve moved to a higher cost-of-living area in the suburbs of Seattle (from the Front Range in Colorado).
Plus, now that the chances are greater that both of us could be out of work at some point, we decided to bump it up higher. Having that extra security blanket — on top of an already-existing security blanket — is giving us the peace of mind we need to feel safe and be able to sleep at night.
We’re earning interest on our savings
It’s true that interest rates on savings accounts have gone down lately. Last year, my bank (Ally Bank) was offering interest rates as high as 2.20% APY, but it has quietly brought the rates down since then.
Saving money isn’t as lucrative as it was before. But, it’s not down to 0% APY, at least not yet. And keeping our money in a high-yield savings account is a safer bet in the short term than the stock market right now (our long-term strategy is still holding up, by contrast).
We may not be able to get the money back if we make a debt payment and need it later
So far, our income is doing fine. As a freelancer, I’ve seen my income drop quite a bit, but I’m still earning more than enough. My husband has (we think) a relatively secure position as a software engineer.
We don’t have a crystal ball, though, and we know it might not stay that way. Given the economic turmoil happening right now, we want to play it safe and keep our options open. That means having more cash on hand.
If we continue making our normal monthly payments towards the student loans ($362) over the next six months while payments and interest are paused, we’ll have locked away $2,172 that we might need. That’s roughly the cost of our rent for one month.
The Department of Education has issued guidance, saying that any auto-debit payments taken out can be refunded if you contact your loan servicer. (Servicers aren’t supposed to be taking out any auto-debit payments right now, but if they do, you can get the money back.) But if we made an extra payment, it wouldn’t be an auto-debit; it’d be a manual payment — and we’d be kissing that money goodbye.
We can always pay more towards the loans after September
In the worst-case scenario, both my husband and I lose our sources of income entirely. It’s an unfortunate thing that’s happening to countless people right now, and we’re thankful every day that we’re still working. If we do lose our income, though, we’ll be well-protected until we can find another way to earn money.
In the best-case scenario, our income holds up throughout this crisis and when things pick back up, we’ll have plenty of extra savings. If that happens (and hopefully it does), we can always make extra loan payments at that time.
When you’re going through challenging financial times, one of the most important things is to keep your options open and keep a hefty safety blanket in place. By putting all of our extra money into cash savings and avoiding tying it down someplace we can’t get it — like the market — we’re hopeful that we’ll come through this thing just fine.