What to do when student loan payments resume

After over 3 years of being paused as part of the pandemic relief package, student loan interest is going to start accumulating again on September 1^st of this year, with payments to resume in October.

While there are talks of establishing a new loan forgiveness plan under the Higher Education Act, the road to its implementation will be long, and student loan interest will continue to accrue during that time.

Here are some steps you can take to make sure you’re prepared for payments to resume.

Step 1: Assess your personal financial situation

To understand if it makes sense to pay off your student loans immediately or invest the money instead, ask yourself the following questions:

1. How much do you have in savings?

2. What is your savings account Annual Percentage Yield?

3. Can you pay off your student loans and still have at least 3 months of necessary expenses covered with your savings?

4. How much student loan debt do you have and what is the interest on each loan?

5. How much do you have in your investment accounts and are you on track to retire?

6. Do you have any other debt with a higher interest rate that needs to be paid off first?

Step 2: Understand what’s important to you financially

Determine if you want to pay off your loans sooner (save on interest, but potentially miss out on greater returns had you invested the money) or later (pay more interest, potentially offset the interest by investing the money if you have the discipline to do so). Think about the opportunity cost of each decision and how it will affect you financially down the road.

Ask yourself the following questions:

1. How important is paying off your student loans to you personally?

2. If you were to pay off your student loans, are there any other major purchases you would be putting off?

3. Would you rather pay off your student loans first, or put that same amount of money into an investment account?

4. If you decide to just make the minimum payment on your loans, do you have the discipline to invest any extra money each month?

5. Is there a date by which you’d like to fully pay off your student loans?

Step 3: Making the decision

Once you have answers written down for the first two steps above, you can weigh your options and make the decision on how to handle upcoming student loan payments. Here are some considerations to take into account when making your decision:

If you have enough money to pay off your loans:

· If you have enough money to pay off your student loans, and no other higher-interest debt to take care of first, consider paying off your loans immediately (or at least a big chunk of the total balance) to prevent having to pay interest on them. This allows you to pay the smallest amount, but you also give up the opportunity to invest that money and generate a potentially higher return than the interest on the loans.

· If you have a high-yield savings account, the yield your savings generate on your capital may be higher than the interest on the student loans. If this is the case, it may make sense to just pay off the minimum on the student loans using the money generated by the HYSA. This keeps more cash available to you, but also means it’ll take longer to pay off the loans.

If you don’t have enough money to pay off your loans:

· Make sure you make a budget that incorporates the monthly loan payment to understand if you need to make any spending cuts to afford the upcoming payments.

· Understand the different repayment plans available to you such as Income-Driven Repayment or Public Service Loan Forgiveness

· Consider different ways to get student loans forgiven via Income Driven Repayment plans, Public Service loan forgiveness, and more.

Student loan payoff is a major financial decision, so make sure to thoroughly weigh your options before deciding. Ultimately, paying off your student loan debt immediately, over a few years, or over many years is a decision that only you can make for yourself, but I hope this article provides you with a framework to make that decision a bit easier to determine. If you’d like to speak 1:1 about options for your student loan repayment or other personal finance topics, feel free to schedule a discovery call or visit my website: RuizGrowthSolutions.com