How to Spend Paused Federal Student Loan Payments

Amy Schultz
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If you've found yourself with hundreds of dollars back in your pocket as a result of the federal student loan payment pause, you have an amazing opportunity to use that money for good.

For some people, continuing to make payments on their student loans to get ahead could be appealing, but for most individuals there are other priorities that should come first.

Here's our recommendation for what to do with your paused federal student loan payments: 

1. Set aside money for upcoming trips or big purchases.

Planning ahead helps you avoid getting into credit card debt and feeling stressed at the time of an event. Decide how much you need to save for the event or purchase, divide by the number of months between now and then, and set aside that amount each month in a dedicated savings account.

2. Save 1 month of expenses in a savings account (Rainy Day Fund)

Unexpected expenses happen, and the best way you can feel control and prepared for a car repair, a medical bill, or any other unexpected cost is to have money set aside in a basic savings account so that you don't have to resort to using a credit card. We consider this your Rainy Day Fund, and it should be 1 month of expenses in a basic savings account that's linked to your checking (so you can do an instant transfer if needed).

3. Pay off high interest debt

If you have high interest credit card debt or personal loans, and you have already planned ahead for big purchases and set aside 1 month of expenses in savings, your next move should be to pay down as much of the high interest debt as possible so you aren't hit with significant interest charges. Plus, the faster you pay off your high interest debt, the faster you have that payment to put back in your pocket as savings!

4. Build 3 months of earnings in a high yield savings account (Emergency Fund)

Nothing makes you feel more powerful financially than having money set aside for big life changes, whether they are planned or not. At Bolder, we believe everyone needs an Emergency Fund, and starting small is absolutely okay.

If you have completed steps 1-3 above, set aside some or all of your remaining student loan payments in a high yield savings account (like Ally, Capital One, or Marcus), and keep contributing monthly until you reach 3 months of earnings. This amount is meant to protect you if you experience a big unexpected emergency, like losing your job or becoming unable to work.

5. Start investing, and take advantage of retirement accounts!

If you are already maximizing your retirement contributions (to your 401k or an IRA or both), great! Start investing with a taxable brokerage account, either by meeting with a financial advisor, doing it yourself with an app like Robinhood, or using a roboadvisory platform like Betterment or Wealthfront.

If you aren't already maximizing your retirement contributions, start there! Increase your 401k contribution to get the full employer match, if applicable, or make contributions up to the annual limit of $20,500. For your IRA, you can make contributions up to the annual limit of $6,000 (depending on your income level) and for a Health Savings Account (HSA) you can contribute up to $3,750 for an individual.

P.S. While you're enjoying a little extra cash in your pocket, don't forget to prepare for when payments resume in January!

👇 Need a little help? Talk to a Bolder Money Coach about how to make the most of your student loan payments.

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