How to Pay Down Student Loans Faster During Covid-19

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By Mark Kantrowitz

April 19, 2021

Federal student loans held by the U.S. Department of Education are eligible for a payment pause and interest waiver that temporarily sets the interest rate to zero during the Covid-19 pandemic. Any payments made on these loans will be applied entirely to principal, accelerating repayment of the loans.

Benefit of Continuing to Make Student Loan Payments

The student loan payment pause and interest waiver effectively puts your loans into hibernation. You will owe the same amount after the end of the payment pause and interest waiver as before the pandemic.

You’ll be no worse off after the pandemic, but also no better off.

If you decide to make payments on your eligible federal loans during the payment pause and interest waiver, you can get ahead on your loans. Since interest isn’t being charged, you will make more progress toward paying off your student loan debt.

How Much Can You Save?

The savings from continuing to make student loan payments depends on a few specific details of your loans, such as the interest rate, the length of the repayment term and where you were in the repayment term.

How loan repayment works

Suppose you owe $30,000 in eligible federal student loans at a 5% interest rate, with a 10-year repayment term. Your monthly loan payment is $318.20. Initially, $125.00 (39%) of each payment is applied to interest before the rest is applied to principal. As the loan balance is paid down, less of each payment is paid to interest. By the end of the fifth year, only $71.28 (22%) of each payment is applied to interest. At the start of the last year, only $15.49 (5%) of each payment is applied to interest.

Borrowers who are near the start of repayment will benefit more than borrowers who are close to the end of repayment.

If the payment pause began at the start of repayment, a borrower who owes $30,000 at 5% interest with a 10-year repayment term will save about $3,333 by continuing to make monthly payments for the duration of the 19-month payment pause and interest waiver. That’s a savings of 8.7%.

If you wait to get started, your savings will be lower. If you make payments for only 6 months of the payment pause and interest waiver, the savings is $1,179 or 3.1%.

Interest rate

The savings also depends a lot on the interest rate. At 2.75% interest, the savings is just $1,530 or 4.5%. At 6.8% interest, the savings is $5,193 or 12.5%.

Length of repayment term

The savings also depends on the length of the repayment term. A longer repayment term yields a lower monthly loan payment, so a greater share of each payment is initially applied to interest. For example, a $30,000 loan at 5% interest on a 20-year repayment term starts off with the same amount of interest ($125.00), but the monthly loan payment is lower ($197.99), so initially 63% of each payment is applied to interest.

The savings from continuing to make payments during the 19 months of the payment pause and interest waiver is $5,501 or 11.6%.

Regardless of the details, continuing to make payments has the potential to save thousands of dollars on your student loans.

How to Make Principal Payments on Your Federal Student Loans

If you want to continue making payments on your federal student loans, despite the payment pause and interest waiver, you’ll need to make the payments manually. AutoPay, where the loan payments are automatically transferred from your bank account to the loan servicer, has been suspended, as have the AutoPay discounts.

Contact your loan servicer to ask how you can continue making payments. Confirm the address where you should send payments or whether you can make the payments by bank transfer through the loan servicer’s web site.

A Few Caveats about Continuing to Make Student Loan Payments

Don’t continue making payments if you are pursuing loan forgiveness, such as public service loan forgiveness, teacher loan forgiveness or the forgiveness after 20 or 25 years in an income-driven repayment plan. If you do, you’re just reducing the amount of forgiveness you will eventually receive.

Eligibility for the student loan interest deduction will be affected by the payment pause and interest waiver. The student loan interest deduction is based on the interest paid on federal and private student loans. Since interest isn’t being charged on eligible federal loans, the student loan interest deduction will be lower, even if you continue making payments on the loans. You might still qualify for the student loan interest deduction based on interest paid on ineligible loans, such as commercially-held FFEL loans and private student loans.

Alternatives to Continuing to Make Student Loan Payments

Before deciding whether to continue making student loan payments, build or bulk up your emergency fund. You might still have your job now, but who knows what might happen in a month or two.

To save more money, target the payments at higher-interest debt, which might not be student loans but credit cards.

Consider saving the money for retirement if you can earn a higher rate of return than the interest rates on your student loans and other debt.  Maximize the employer match on contributions to your retirement plan, as that’s free money.

A good place to start:

See the best 529 plans, personalized for you

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