5 Things Lawyers Should Do During the Extended Student Loan Freeze

The extension of the student loan payment freeze is a relief to many law school borrowers. For some lawyers, it is an opportunity to make payments on their student loans without any interest being added. But that isn't the most financially optimal decision. Instead of making payments, there are 5 other ways lawyers can take advantage of this extension: contribute to their emergency fund, pay off other debts, contribute towards prior-year contribution limits for some accounts, save for other financial goals, and avoid increasing their monthly spending patterns.

On December 22nd, President Biden announced an extension of student loan relief until May 1st. The extension gives lawyers with student loans another three months to determine how to pay off their loans and begin making payments.

Some lawyers may hate the idea of having student loans. For others, it may be an opportunity to pay off their student loans without adding any interest to the total amount owed.

For most borrowers, this extended student loan freeze offers an opportunity to take money that would have otherwise gone towards student loan payments and put it towards other things.

When student loans have a 0% interest rate and are not mandatory, a lawyer's money is nearly always better used on other things. For lawyers who want to know about some ways they can take advantage of the student loan freeze extension, here are five things lawyers can do to put themselves in a better financial position before student loan payments resume.

Contribute to your emergency fund

A piece of advice I commonly give is to build up an emergency fund. Why? Because an emergency fund is critical to protecting lawyers from unexpected financial events. Lawyers can't be sure that they won't lose their job when student loans restart or that they will face an unexpected medical or car expense.

When lawyers begin repaying their student loans, many law school borrowers may face monthly payments that will exceed $1,000 per month. These payment amounts can be a significant financial burden. If another unexpected event happens too, it could become difficult for a lawyer to manage financially.

To help protect against an unexpected expense or losing a job, lawyers should consider saving up 3-6 months of expenses in their savings account, including 3-6 months of student loan payments. Doing so gives a lawyer a financial buffer to handle any unexpected events.

Pay off other debts

For most lawyers, their student loans have interest rates between 5-7%. A general rule of thumb is that you should pay off debts with the highest interest rate. When student loan interest rates are 0%, other debts most likely have a higher interest rate. If a lawyer has credit card debt, a car loan, a mortgage, or private student debt, making payments on all of these will likely be a better use of a lawyer's money than student loans.

For lawyers with credit card debt, interest rates on average are over 15%. A 15% interest rate is much higher than 0% and higher than most investors can reasonably expect to earn over an average investment year. Therefore, lawyers with credit card debt should seriously consider using money that would have gone towards student loans to pay off their credit card debt.

Contribute towards your prior-year contribution limits

There are financial accounts subject to annual contribution limits for a year. Some of these accounts will allow people to continue contributing to the prior year's contribution limit even into the following year, including IRAs, Roth IRAs, HSAs, Archer Medical Savings Accounts, and Coverdell Education Savings Accounts, generally through April 15th.

For lawyers who have money that would have gone towards student loan payments, this money can now go towards one of these accounts. Some of these accounts even have tax benefits, meaning contributing early in the year can lower a lawyer's prior-year tax bill. Saving money on taxes offers a better return than making payments on a 0% student loan during the freeze.

Save for a goal

For most lawyers, paying off student loans is not the only goal in their life. It's likely not even their most important goal. Some lawyers want to buy a home or a car. Others may want to go on vacations or start a family.

Lawyers who face a future $1,000+ monthly expense for student loans can now apply that money towards their other goals. $3,000+ of extra savings and investments makes a difference when pursuing financial goals. Figure out what goals are most important to you, then put that money towards saving for it. If you have multiple goals, contribute a percentage of the would-be student loan payment towards each of them.

Don't increase your monthly expenses

This pause in student loan payments appears to be temporary. Many borrowers will notice the extra money in their account each month and increase their expenses because they can afford to. Unfortunately, if/when the student loan payment freeze ends, borrowers who do increase their monthly expenses will have to cut back to make their student loan payments.

Budget cuts can be challenging because the payment amounts may require a lot of spending cuts across different categories. Borrowers also grow accustomed to these expenses. When they have to make changes, it can leave borrowers feeling like they are forced into a lower standard of living.

Lawyers who receive raises between now and when student loan payments resume should try to maintain and not increase their monthly expenses. Doing so should make it much easier to make payments than cutting back on future monthly spending habits.

The purpose of the student loan payment freeze is to provide relief to Americans during COVID. Be conscious about your spending and try not to increase your monthly expenses if possible. You'll be happy you did when student loan payments resume.