Since our friend, the novel coronavirus, crashed our longest economic expansion party several months ago, we’ve seen the worst unemployment rates since the Great Depression. Millennials have been especially hard hit by the job losses the coronavirus has caused because young people make up the majority of service workers, which have essentially been eliminated due to social distancing and travel restrictions.
As job losses continue, millennials are faced with another problem, the staggering $497.6 BILLION they carry in student loan debt. High job losses and student loan debt are the two ingredients needed to create a millennial financial disaster. Luckily, the government stepped in and decreased federal student loan interest to 0% and suspended loan payments through September 2020. This move was critical to helping unemployed millennials survive until they’re able to find work again. However, if you’re one of the lucky millennials who are still employed and able to continue paying off your student loans, this loan suspension is a great opportunity for you. Here is why you should keep paying your student loans off during the suspension if you can.
How Loan Payments Work
Your loan payment is a pre-determined amount that you agree to pay each month until you repay the principal amount you borrowed, as well as any interest you are charged over the term of the loan. Your payment first covers any interest you are charged that month, and the remainder of your payment is used to pay down your principal. Each month as your principal balance decreases, the interest you are charged also decreases, so a larger portion of each payment goes toward paying down your principal. Since this is confusing AF to understand by reading about it, take a look at the table below to see an example of how this works.
We’ll use the current average student loan debt, interest rate, and monthly payment in our example.
- Average Student Loan Debt (Principal) – $33k
- Average Federal Student Loan Annual Interest Rate – 4.45%
- Average Monthly Student Loan Payment – $393
|Month||Principal Balance||Payment||$ Applied to Interest||$ Applied to Principal|
As you can see in the example, as your principal lowers, so does your interest, and therefore the amount of your payment allocated to paying down your principal increases. During the term of your loan, more of your payment will be allocated to paying interest in the beginning, and almost all of your payment will be allocated to your principal as you near the end of your loan. Now that you understand the basics of loan payments, I’m going to tell you why continuing to make your student loan payments during the suspension will save you money and help you pay off your loan faster.
Why You Should Keep Paying Off Your Student Loans Now
As part of the Covid-19 relief that the government passed to help reduce the financial strain caused by the massive economic shutdown, federal student loan payments were suspended and interest was reduced to 0%. If you’ve recently lost your job, this reduction in monthly spending makes an enormous difference. The $393 you were using to pay off your student loans can now be used to pay rent or buy groceries. If you aren’t unemployed right now (lucky you!) this may seem like a great time to use this extra money to complete a home project or buy an expensive item you’ve been wanting. It doesn’t matter if you keep making your payments since you aren’t being charged any additional interest or penalties, right?
Continuing to pay off your student loans if you’re able to will benefit you enormously. Why? ALL of your payment will go toward paying down your principal! You don’t have to sacrifice any of your payment to interest. This helps reduce your total loan balance, so when the government does start charging interest again, you’ll be charged less interest since your balance is lower. In the example above, the interest that you will pay over the length of the loan is $6,611. If you take advantage of the 6 months of interest-free payments offered by the government during the suspension, you will only pay $5,592 in interest. That’s a savings of over $1,000! Not only will you save money, but you’ll also reduce the length of your loan by at least a few months. If your student loan balance is larger than $33k, the impact on your interest savings and loan length will be even larger. Who doesn’t want to save money and pay off their student loans faster?! I know I do.
How to Check on Your Loan Payments
Since the government suspended loan payments for federal student loans through September, they have stopped accepting any automatic payments that were previously set up. My husband and I ran into this problem when we reviewed our finances this month. We were taking our debt inventory and realized that his federal student loan balance hadn’t gone down. After looking further into it, we saw that his automatic payments had been stopped.
If you check your account and realize this has also happened to you, you have two options. You can send manual payments through September when the loan payment suspension is scheduled to end, or you can call or email to have your automatic payments reinstated. No, there isn’t an easy option to just click something that says, “please keep taking my money”, but what else would you expect when dealing with the government?
We all want to pay off our student loans as quickly as possible, and you’ve just been given a leg up on doing it. If you’re still employed and able to, capitalize on this moment. Continue making your loan payments and drive down your principal. We may not all agree on the government’s response to the coronavirus, but I think we can all agree that crossing the debt-free finish line sooner while saving lots of money is an awesome plan. Now go give that letter to reinstate your automatic loan payments to your carrier pigeon so she can fly it to Sallie Mae asap.