For the 8 million student loan borrowers whose payments have been on pause since July, redirecting that cash to a high-yield savings account can be a great way to earn while you wait. Top rates are over 5.00%, but may not be that high once your loan payments resume.
The interest-free forbearance applies to borrowers enrolled in the Biden administration’s Saving on a Valuable Education (SAVE) student loan repayment plan, the legality of which is currently being decided in federal court. Meanwhile, SAVE enrollees are in limbo: Borrowers are not required to make payments toward their debt during the forbearance period, but if they choose this option, they’re also not making progress toward paying off their debt.
This is especially frustrating for those registered for Public Service Loan Forgiveness (PSLF), which requires payments to be made while working for a government or nonprofit organization. While in forbearance, PSLF enrollees don’t receive credit toward their loan forgiveness.
Though switching to the previously discontinued Pay As You Earn (PAYE) or Income-Contingent Repayment (ICR) plans may be an option later this fall for those wishing to resume payments as soon as possible, others may prefer to wait for the court’s decision, which could take another six months, according to the Department of Education.
The average monthly student loan payment is $500. Instead of spending that money while your loan is in forbearance, consider putting it in a high-yield savings account.
The top high-yield savings accounts offer APYs of up to 5.50%. After six months of saving $500 per month at this rate (and not withdrawing), you’d earn $33.74 in interest for a total balance of $3,033.74. Not bad for maintaining full access to your money during that period.
Keep in mind there’s no guarantee when student loan payments will resume. It could be sooner or later than six months from now. But if you keep saving the payments you would have made, your money will continue to grow. Then, once they resume, you can pay off a big chunk of your student loan debt early or pick up where you left off and invest the savings elsewhere.
If you are one of the PSLF borrowers whose payments were paused during their employment at a government or nonprofit agency, you may be able to “buy back” some of these lost months.
To be eligible, you must already have the 10 years (120 months) of qualifying employment required by the PSLF program, and buying back months in forbearance or deferment would complete your 10 years of required payments. If your buyback request is approved, you’ll have 90 days to pay off the remaining loan balance.
Of course, you’ll need to have funds available for that final payment, which is another reason it’s smart to set save the money you would have used for payments in a high-yield savings account.
Ultimately, the best way to protect yourself against the uncertain future of student loan forgiveness is to start building a dedicated savings fund. That way, no matter what happens, you’ll be prepared to adapt.
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