Think Twice Before Paying Off Your Federal Student Loans in 2021

Photo to accompany story about student loan debt. Getty Images

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If you’re thinking of paying off some federal student loans in the New Year, you might want to hold off. There may be better uses for your money.

Federal student loan borrowers received welcome news recently, that they could continue skipping their monthly payments until February 1, 2021. The forbearance is part of a program that began this summer under the CARES Act.

The recent announcement gives many graduates an additional month of financial relief.

But even if we’re to believe that the loans will come due again in early 2021, I don’t recommend working extra hard to erase your government loans this year. Pay the minimums, as needed, but not a penny more.

This isn’t the traditional advice we’re used to hearing. Debt is a four-letter word, after all. Why delay becoming debt-free if you can help it? 

Well, in this weird moment in history, I think there are better strategies for our money—like building an emergency fund of savings—than aggressively paying down federal student loans. 

For one, the pandemic is far from behind us, and more than 12 million Americans are currently unemployed. As such, I wouldn’t be surprised if more debt relief arrived in a third round of stimulus. And I’d fully support riding that train. 

Pro Tip

Payments on federal loans are currently deferred through January 31, 2020. Until then, you won’t owe any principal or interest. 

President-elect Joe Biden has vowed to bring much-needed change to the student loan debt debacle, which tops more than $1.6 trillion. For those who are already out of school and bogged down by debt, the new administration’s plan is to provide more loan forgiveness for those who choose to work in public service, and make the existing Income-Based Repayment Plan (an Obama-era provision) even more affordable by reducing the monthly payments by more than 50%. 

If you only have a few thousand dollars left on your Stafford loan, well, ok. Pay it off. There’s something to be said for going to bed at night knowing you are debt-free. But again, only do this if it’s a small amount and you can easily afford it. 

And if your student loans are privately held, these rules don’t apply. You might explore refinancing to lower your monthly payments, or asking for a forbearance from your provider.

But if you have tens of thousands or more in federal student loan debt and other financial holes to fill—like paying off higher-interest credit card debt, beefing up savings, or contributing to your retirement plan—the smart money, I say, is to focus on those areas first. 

It’s most certainly where you’ll get more bang for your buck.