Under the Cares Act, Congress signed in to law broad relief for federal student loan borrowers. If you are currently in repayment mode, your payments will automatically stop from March 13, 2020 through Sept 30, 2020. Congress also temporarily set the interest rate on all federal student loans to 0%. However, if you would like to continue to make payments during this period, you may choose to do so.
So, what’s right for you? If you are in a situation where you can still continue to pay on your federal student loan, then it would be wise to continue to do so. The reason would be that the current payment you were making will now go FULLY towards principal and in effect help you pay off your loan quicker and save you money!
Here is a comparison of a 6% interest rate vs 0% interest rate for a 7-month period:
Principal = $30,000
Term = 10 years (120 months)
Interest = 6%
Payment = $333.06
| Payment Date | Payment | Principal | Interest | Total Interest | Balance |
| Mar-20 | $333.06 | $183.06 | $150.00 | $150.00 | $29,816.94 |
| Apr-20 | $333.06 | $183.98 | $149.08 | $299.08 | $29,632.96 |
| May-20 | $333.06 | $184.90 | $148.16 | $447.25 | $29,448.06 |
| Jun-20 | $333.06 | $185.82 | $147.24 | $594.49 | $29,262.24 |
| Jul-20 | $333.06 | $186.75 | $146.31 | $740.80 | $29,075.49 |
| Aug-20 | $333.06 | $187.68 | $145.38 | $886.18 | $28,887.81 |
| Sep-20 | $333.06 | $188.62 | $144.44 | $1,030.62 | $28,699.19 |
Total interest PAID over the 6% interest rate 7-month period would be $1,030.62.
Principal = $30,000
Term = 10 years(120 months)
Interest = 0%
Payment = $333.06
| Payment Date | Payment | Principal | Interest | Total Interest | Balance |
| Mar-20 | $333.06 | $333.06 | $0.00 | $0.00 | $29,666.94 |
| Apr-20 | $333.06 | $333.06 | $0.00 | $0.00 | $29,333.88 |
| May-20 | $333.06 | $333.06 | $0.00 | $0.00 | $29,000.82 |
| Jun-20 | $333.06 | $333.06 | $0.00 | $0.00 | $28,667.76 |
| Jul-20 | $333.06 | $333.06 | $0.00 | $0.00 | $28,334.70 |
| Aug-20 | $333.06 | $333.06 | $0.00 | $0.00 | $28,001.64 |
| Sep-20 | $333.06 | $333.06 | $0.00 | $0.00 | $27,668.58 |
Total interest SAVED over the 0%, 7-month period would be $1,030.62.
As you can see, the $333.06 monthly payment would now fully go towards paying off principal on your federal student loan instead of splitting between principal and interest. Again, only continue to pay if you can afford to do so. This Cares Act relief was put into place to help those who have lost all or part of their income due to the current pandemic. But if your income remains the same, take advantage of this new money saving opportunity!
Steven Dengler, CFP®
Financial Advisor / Director of Planning
Your local Towson Financial Advisors
https://studentaid.gov/announcements-events/coronavirus#zero-interest-questions
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Mosaic Asset Partners, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.