Pause on student loan payments is extended through end of December. Here are smart ways for borrowers to use the extra cash

A pause on federal student loan payments that began more than two years ago will now continue through December 31, President Joe Biden said Wednesday.

The extension — coming just a week before payments were scheduled to resume — was included in Biden’s announcement on Twitter that the government will forgive up to $20,000 of federal student loan debt for borrowers who have received Pell grants and $10,000 for all others. The relief is limited to individuals with income of less than $125,000 or, for families, under $250,000. 

This marks the seventh time that the government has continued the freeze on loan payments. It began in March 2020 under President Trump when the pandemic upended the U.S. economy and has been continually renewed since then. 

This will be the final extension, Biden said. 

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For borrowers, the reprieve translates into having a few more months of extra cash in their budgets — which means it’s worth considering how best to use that money before payments resume.

If you have no emergency savings, it may be worth setting aside what you’re not paying to a student loan servicer so you have a cushion going forward, said certified financial planner Carolyn McClanahan, founder of Life Planning Partners in Jacksonville, Florida.

“The first thing is to make sure you have an emergency fund,” McClanahan said.

Financial experts typically recommend having at least three to six months’ worth of income set aside in case of a job loss or other unexpected expense.

If you already have emergency savings, look at your 401(k) plan to be sure you’re contributing enough to get the employer’s matching contributions, McClanahan said.

You also should look at any debt with a high interest rate — like credit cards. The average rate on that plastic is currently about 18%, which generally is higher than other forms of consumer debt such as a mortgage or an auto loan.

“If they have high-interest debt, use this time to get that debt down,” McClanahan said. 

Otherwise, she said, “you can save it and then make bigger payments when they restart.”

More than 40 million Americans are in debt for their education, owing a cumulative $1.7 trillion, according to the White House.