Here are smart ways to make most of the pause on student loan payments

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The U.S. Department of Education has offered most federal student loan borrowers the option to suspend their payments until September without accruing interest because of the financial fallout from the pandemic.

Most have accepted. In fact, only about 10% of the country’s 44 million student borrowers are currently repaying their loans, according to data analyzed by higher education expert Mark Kantrowitz. The rest don’t.

Of course, many people who have taken a break from their monthly bills need to redirect the extra money to essentials after losing jobs and income.

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But for others, the suspension of payments offers borrowers opportunities to get on their feet financially. The average student loan bill is about $400 a month, Kantrowitz says.

For example, Morgan Hopkins, a director of policy at a national nonprofit, paid off more than $17,000 in credit card debt during the payment hiatus. And that opened other doors for her.

“I can save more, invest more in retirement,” said Hopkins, 32. “It’s such a relief.”

Below are some clever ways to use the extra cash.

1. Build your emergency reserves

Even if you’ve managed to keep your job so far, you don’t know what could happen in the next few months.

It’s important to have a healthy savings account to fall back on, experts say.

“More than a third of American workers have lost their jobs during the pandemic, and it’s not over yet,” Kantrowitz said.

If you have to endure a spell of unemployment, try to pile up at least six months’ expenses in cash, Kantrowitz said.

To get the best return on your cash, invest your money in a high-yield savings account.

Also, make sure the account is FDIC insured, which means up to $250,000 of your deposit is protected against loss.

2. Deal with credit card debt

With interest rates on most government student loans at zero, it’s a good time to start making progress on paying down more expensive debt. The average interest rate on credit cards is currently over 16%.

But make sure you have a healthy emergency savings account before dealing with credit card debt, said Ted Rosman, industry analyst at Creditcards.com.

That’s because you shouldn’t rely on your credit limit as a safety net.

“Many people unexpectedly reduced their credit card limits over the past year because lenders were particularly concerned about the risk,” Rossman said.

But provided you have enough cash, you can save a lot of money by reducing credit card debt.

Rossman provided an example: If you have $5,500 in credit card debt and only make the minimum payments each month, you’ll have to pay for more than 16 years and shell out an additional $6,072 just for interest.

However, if you spend an extra $400 a month on that credit just for the next seven months, you’ll shorten that schedule by six years — and you’ll save $3,733 in interest as a result.

3. Consider paying off your student loans anyway

If you have an adequate savings account and no credit card debt, it may make sense to continue paying off your student loan during the break.

Since interest is temporarily suspended, all payments will be credited directly to the principal of your debt, potentially shortening your repayment period.

“You can continue to make payments each month by contacting your servicer, or save the money and make a lump sum payment on your highest-interest loan before interest starts accruing again when repayments start again,” said Anna Helhoski, Student Loan Expert at NerdWallet.com.

There’s a big caveat here, though: if you’re enrolled in an income-based repayment plan or seeking government loan forgiveness, you don’t want to keep paying your loans.

That’s because months during the government’s payment pause still count as qualifying payments for these programs, and since both lead to forgiveness after a certain time, any money you throw on your loans during that time only reduces the amount you end up receiving apologies.

4. More options

Some borrowers may want to invest the extra money. They’ll probably thank themselves for it later.

For example, if you invest $400 per month over the next eight months, or a total of $3,200, your investment would grow to more than $5,800 in 10 years, assuming a 6% annual return.

Another option: If you’re doing well financially during the pandemic and there’s no point in continuing to pay off your student loans, then donate the extra money.

You can make sure an organization is reputable by using tools like the Wise Giving Alliance or the Better Business Bureau’s Charity Navigator, Helhoski said. If the charity is 501(c)(3) registered, you are also eligible for a tax benefit.

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