Why I’m Waiting to Pay Off My Student Loans: The Impact of the CARES Act and Economic Uncertainty

Right now I have approximately $58k in federally backed student loans and here’s why I’m not aggressively paying them off. I feel this is a contrarian position in the personal finance community.

BLUF: Right now I am maximizing cash liquidity as a buffer against a prolonged economic recovery. The recent CARES act puts these loans effectively at 0% so I would rather build a war chest just-in-case, or to take advantage of any opportunities coming out of the COVID crisis.

About the loans:

They represent 4 years at a public university for undergrad and 1.5 years at a public university for MBA and are a mix of subsidized and subsidized varieties. The interest rates on them range from 5.5% on the low end to 6.75% on the high end.

I am currently on the extended repayment plan. That means in exchange for a lower monthly payment I pay more in interest. There’s no free lunch. Thankfully, right now the CARES act puts the kibosh on payments until September 31, 2020. All federally-backed loans are technically in forbearance and at 0% interest.

Below is the breakdown of the higher ed damage:

Loan Program	Current Rate (as of 5/1/2020)	Principal Balance
Unsubsidized	0%	$6,588.93
Unsubsidized	0%	$841.70
Subsidized	0%	$15,862.88
Unsubsidized	0%	$4,399.70
Unsubsidized	0%	$19,963.38
Unsubsidized	0%	$9,997.91
	Total	$57,654.50

What about a refinance strategy to a lower-cost private lender?

It is tempting with rates at an all-time low right now. And if recent press conferences with Jerome Powell, Chair of the Federal Reserve are any indication it seems the fed will hold rates near 0% for a while. In turn, banks will likely continue to offer attractive rates.

I could change the federally-backed loans to a private lender and save a lot in interest allowing me to attack the principal more aggressively. Recently I’ve seen rates as low as 2.75% APR. This would result in almost an extra $100 each month going towards principal instead of interest and cutting down my time to payoff by 7 years.

Right now I am holding steady to keeping the loans with a fed-backed servicer. I know this means I pay more in interest but I am willing to pay this for little extra flexibility and safety net in a few areas:

The ability to pause loan payments due to economic hardship

If I lose my job or my income radically decreases I can easily reduce the required minimum payment or pay only interest. I can draw out the number of months on the loan note and do “Income-Based Repayment” that ties the payment directly to my income.

It’s not an ideal situation but it’s a comfort to know that I don’t need to choose between making rent or paying student loans.

No prepayment penalties

No prepayment penalties combined with the ability to pause or reduce payments is where the magic comes in. I can set my default minimum payment more conservative number as an insurance policy. When times are good I can ramp up my monthly payments to

The promise of student loan forgiveness

I am not going to hold my breath on this one. It’s a long-shot but there does appear to be mounting support for some amount of student loan forgiveness. The amounts discussed run the gamut of $5,000 to full-forgiveness. If any package passes I suspect a more legislatively palatable amount will be in the $5,000 to $10,000 range which could impact federally held loans first.

How my strategy from fed to private-backed loans will evolve over time

Once I accumulate a stronger emergency fund I may go back and try to lock in a lower private rate. Money at 2.75% APY is seriously cheap. If I were to go this route I would try to go for the longest term possible and put the cash savings in some more productive vehicles. Think, if I can get cash for 2.75% and invest and get an 8% rate of return the money is best in investments. The key will be to effectively manage risk so I am not overleveraging and my backside is not exposed.

What are some of your strategies with student loan repayment? Do you think my conservative position towards cash preservation is smart or foolish in this market?