We put our student loan money in a high yield savings account

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  • I paid off my private student loans before the coronavirus pandemic hit, but my husband and I are still paying off his federal loans.
  • While I would like to get the debt released as soon as possible, we have decided not to make any additional payments on his loans while payments and interest are suspended under the CARES Act.
  • We think it’s smarter to put this money into our emergency fund just in case we lose our income – we can always use it to make a lump sum payment for a student loan later.
  • Until then, we keep the money in a high yield savings account so that we can earn interest on our funds.
  • See Business Insider’s Choices For The Best High Yield Savings Account »

I repaid my private student loans on February 10, just as the coronavirus was turning its course towards the United States.

It was a bittersweet day. I have made a lot of financial mistakes in my life and consider my student loans to be one of them. But by February 10, they were gone, and only one obstacle remained between me and the sweet, sweet freedom of debt: my husband’s federal student loans.

Then everything changed in a flash. On March 27, the CARES law was enacted. He suspended most federal student loan payments, and the interest rate on those loans was set to 0%. These changes will last until September 30.

No one could have planned for this, and it’s a huge (albeit temporary) boon to the millions who are still paying off their federal student loans. For us, that meant a huge change in financial strategy. Instead of spending all of our extra money on debt repayment, we are funneling it into our emergency fund instead. Here’s why.

There is no benefit to repaying federal student loans at this time

Normally, it’s a good idea to pay off your debt. You will save on interest and free up money in your budget.

But these are not normal times. Now that the interest rate is set at 0% and no payment is required, these benefits are temporarily phased out. Cost-benefit analysis has shifted more to the cost side than to the benefit side. In other words, making additional student loan payments right now isn’t smart.

In fact, the only real benefit of paying extra on our loans now would be getting a little closer to debt freedom. That’s not a trivial consideration – as a former debt free blogger, I hate debt with a passion – but right now our money can serve us better in other ways.

We build our cash cushion

Before the coronavirus hit, we had a $ 10,000 emergency fund in place. However, we’ve since revisited our calculations and realized that wasn’t enough since we moved to a higher cost-of-living area in the Seattle suburb (from Front Range, Colorado).

Also, now that the chances are greater that we will both be unemployed at some point, we have decided to increase it. Having that extra security blanket – on top of an already existing security blanket – gives us the peace of mind we need to feel safe and able to sleep at night.

We earn interest on our savings

It is true that interest rates on savings accounts have come down in recent times. Last year my bank (Ally Bank) offered interest rates as high as 2.20% APY, but it has quietly cut rates since then.

Saving money isn’t as lucrative as it used to be. But, it hasn’t come down to 0% APY, at least not yet. And keeping our money in a high yield savings account is a safer bet in the short term than in the stock market now (our long term strategy still holds up, though).

We may not be able to get the money back if we make a debt payment and need it later

So far, our income is doing well. As a freelance writer I have seen my income drop a bit, but still earn more than enough. My husband has (we think) a relatively secure position as a software engineer.

However, we don’t have a crystal ball and we know it might not end there. With the economic turmoil happening right now, we want to play it safe and keep our options open. It means having more money on hand.

If we continue to make our normal monthly student loan payments ($ 362) over the next six months while payments and interest are suspended, we will have frozen $ 2,172 that we may need. That’s about the cost of our rent for a month.

The Ministry of Education has directives issued, specifying that any direct debit payment made can be refunded if you contact your loan manager. (The servers aren’t supposed to do a direct debit right now, but if they do, you can get the money back.) But if we made an additional payment, it wouldn’t be a direct debit; it would be a manual payment – and we would be saying goodbye to that money.

We can always pay more for loans after September

In the worst case, my husband and I lose our sources of income entirely. It is an unfortunate thing that is happening to countless people right now, and we are thankful every day to keep working. If we lose our income, we will be well protected until we can find another way to make money.

In the best-case scenario, our income is holding up throughout this crisis and when things pick up we will have a lot of additional savings. If that happens (and we hope it does), we can still make additional loan payments at that time.

When you are going through tough financial times, one of the most important things is to keep your options open and to keep strong security coverage in place. By putting all of our extra money into saving cash and not tying it up in a place we can’t get it – like the market – we hope we will do just fine.

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