What to do with your $$ while your student loan interest rate is 0% during Covid

Updated: Nov 14, 2021

Hello, Honies! I've received tons of questions over the past few months about what to do with your money while your student loan interest rate is 0% (due to Covid.) There are some SUPER important things to keep in mind if you opt not to make payments towards your student loans during this time. First, allow me to introduce the concept of interest capitalization. When you are in deferment or forbearance on your student loans, traditionally this fun thing called "interest capitalization" happens (hint: it's not fun at all.) Interest capitalization means that interest is still accruing even during forbearance. When forbearance is over, the accrued interest is added to the principal balance of your loan. If you have a large balance, this can easily add tens of thousands of dollars to your total balance when forbearance is over.

Whether we are in the Covid crisis or not, you must be aware of interest capitalization when considering forbearance. Now, onto the Covid stuff. In March 2020, the president signed the CARES Act to provide relief for federal student loan borrowers. The CARES Act automatically places federal borrowers into temporary forbearance until September 2020, which means you can stop making payments. During this time, interest is being temporarily set at 0% on certain types of federal loans owned by the Department of Education: -Defaulted and non-defaulted Direct Loans

-Defaulted and non-defaulted FFEL Program loans

-Federal Perkins Loans Private loans are NOT covered by the CARES act! If you are unsure whether your interest is set to 0%, contact your loan servicer directly.

When it comes to interest capitalization during this time, keep in mind that: 1. If you consolidate your loans in any way during this time, you could be subject to interest capitalization.

2. If you were in deferment/forbearance or had defaulted prior to March 2020, you MUST call your loan servicer to see whether you will be subject to interest capitalization during this time. You can opt to continue making full or partial payments during this temporary forbearance, which in most cases, will be applied 100% towards your principal balance.

Steps to take to decide where to put your extra $$ during this time:

  1. Ensure your loan qualifies for temporary forbearance under the CARES act (call your loan servicer directly)

  2. Ensure you will NOT be subject to interest capitalization (call your loan servicer directly)

  3. If you qualify AND are NOT subject to interest capitalization, I recommend paying off other high-interest debts during this time (and/or building up your emergency savings fund)

  4. If you do not quality, or you ARE subject to interest capitalization, I would recommend continuing to make payments towards your student loans

Additional information on the CARES act and student loans: https://studentaid.gov/announcements-events/coronavirus#zero-interest-questions

Ready to download your free budgeting and net worth worksheets? Just go here!

213 views0 comments

Recent Posts

See All