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Due to the COVID-19 pandemic, payments and interest accrual have been paused on federal student loans by the CARES Act. Payments are scheduled to restart after August 29, 2023.
If you have federal student loans, this means you only have a short time until your payments resume — which is why it’s important to get your finances in shape so you’ll be prepared.
Here are four ways to get financially fit before you start making federal student loan payments again:
1. Create a budget
Creating a budget is a great way to track your monthly income and expenses. Additionally, you can see how federal student loan payments will fit into your current budget and make adjustments if necessary.
For example, if your payments will strain your budget, you can look into trimming expenses, such as canceling unused subscriptions.
To set up a budget, you’ll need to:
- Calculate your monthly income. This might include traditional employment as well as other non-traditional sources, such as a side hustle.
- Calculate your monthly expenses. List out your essential expenses (such as rent and utilities) as well as your non-essential spending (such as entertainment or dining out).
- Subtract your expenses from your income. This amount is the extra room you have in your budget — as well as how much you can afford to pay on your student loans.
For instance, if you want to pay off your student loans in five years, you can check your budget to see how much you can afford to pay on your loans each month and then set a payoff date.
2. Refinance high-interest debt
If you have high-interest debt, you might be able to get a lower interest rate through refinancing. This could save you hundreds or even thousands of dollars on interest — freeing up money in your budget to put toward your student loans.
Or you could opt to extend your repayment term to reduce your monthly payments. Just keep in mind that this means you’ll pay more in interest over time.
Here are a few ways to refinance depending on the kind of debt you have:
Student loan refinancing
Student loan refinancing interest rates are hovering near record lows. If you have private student loans as well as good to excellent credit, you might be able to take advantage of these low rates by refinancing your student loans.
This could save you money on interest and even potentially help you pay off your loans faster.
You’ll also no longer be eligible for the suspension of federal payments and interest accrual under the CARES Act.
If you decide to refinance your student loans, be sure to consider as many lenders as possible to find the right loan for your needs. Credible makes this easy — you can compare your prequalified rates from multiple lenders in two minutes.
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Debt consolidation loan
A debt consolidation loan is a type of personal loan used to pay off various kinds of debt, such as credit cards or other loans. Consolidating your debt will leave you with just one loan and payment to manage, which could make it easier to budget for your student loan payments.
Keep in mind that personal loan interest rates have remained at record lows — so depending on your credit, you might qualify for a lower interest rate than what you’re currently paying.
Balance transfer card
Another way to consolidate credit card debt is with a balance transfer card. With this option, you can move your balance from one credit card to another.
Some balance transfer cards come with a 0% APR introductory offer. This means you could avoid paying interest if you can repay your balance before this period ends.
However, keep in mind that if you can’t pay off the card in time, you could be stuck with some hefty interest charges.
3. Pay down high-interest debt
If you have multiple debts and can’t refinance them for a lower interest rate, you might need to simply concentrate on paying them off as soon as possible.
Repaying some of your debt over the next few months and lessening this strain on your budget could also make it easier to manage federal student loan payments when they resume.
Here are a couple of strategies that might help you do this:
Debt avalanche method
With the debt avalanche method, you’ll focus on paying off your debt with the highest interest rate first. Here’s how it works:
If you’re more motivated by small wins, you might consider following the debt snowball method instead.
Debt snowball method
If you use the debt snowball method, you’ll start by paying off your smallest debt first. Here’s how it works:
But if you’d rather save more money on interest and don’t mind waiting to see your results, the debt avalanche method might be a better option for you.
4. Build an emergency fund
Having an emergency fund can help you pay for unexpected costs and avoid racking up more debt.
In general, it’s a good idea to save enough in an emergency fund to cover three to six months’ worth of expenses — including student loan payments.
Here are a couple of savings options you might consider:
- High-yield savings account: This type of savings account generally offers above-average interest rates. This means you could get a higher rate of return compared to regular savings accounts. Several high-yield savings accounts don’t require an initial deposit, which could be helpful for starting an emergency fund.
- Money market account: This is another savings option that typically provides a higher rate of return than regular savings accounts. Money market accounts often come with higher initial deposits and maintenance requirements compared to high-yield savings accounts, so could be a good option if you already have some money stashed away.
As you get used to saving, you can gradually increase the amount you plan to save in your budget.
