Student Loans: Pay Down or Hold Pat?

One of President Biden’s first executive directives after he took office was to extend the pause on federal student loan payments until September 30. The suspension is welcome news to borrowers who are experiencing economic hardships, and in some cases it could reduce the amount they owe.

During the moratorium, borrowers are credited for monthly payments for the purposes of loan forgiveness, even though they’re not making the payments. A borrower who was enrolled in the public service forgiveness program when the first moratorium was announced last March will be credited for 19 of the 120 credits required for loan forgiveness by September, according to Savi, a tech company that helps borrowers manage their student loans.

Similarly, borrowers who are participating in an income-driven repayment plan, which provides loan forgiveness at the end of a 20- to 25-year repayment term, will also get repayment credits during the moratorium, says Mark Kantrowitz, a financial aid expert and author of How to Appeal for More College Financial Aid.

For that reason, it doesn’t make sense for borrowers who are enrolled in one of these programs to make payments during the moratorium, “because that just reduces the amount of loan forgiveness you’re eligible to receive,” Kantrowitz says.

If you’re not eligible for loan forgiveness, making payments during the reprieve will go directly to the loan’s principal, which would reduce the amount you owe when payments resume. But before you tell your lender you want to make payments — which you’ll need to do, since the suspension is automatic — consider whether there are better uses for your money. You should first pay off any high-interest debt, such as credit card debt, and have at least enough in an emergency fund to cover half a year’s living expenses.