Liz Weston: How to prioritize debt payments in the pandemic
A singular crisis has led to extraordinary relief options for borrowers. Interest and payments have been suspended on federal student loans. Homeowners can apply for almost a year of mortgage forbearance. Credit card issuers and other lenders have greatly expanded hardship programs.
Yet many Americans say they took on more debt last year because of the pandemic, according to NerdWallet’s household debt survey.
If you’re one of them, or have other household debts that have been put on hold, you might not want to rush to pay that money back, even if you can. The COVID-19 crisis and its economic fallout are far from over, so you’ll need to be strategic about pandemic-related debt and other debt.
STUDENT LOANS ARE STILL SUSPENDED
President Joe Biden has extended federal student loan forbearance through October and during his campaign has offered to forgive $10,000 of federal student loan debt per borrower. If you could qualify, consider not making any further payments on your student loan until you see what happens.
Either way, paying off student loans probably shouldn’t be your top priority. The most important goals include saving for retirement, paying off higher interest rate debt, and building up an emergency fund of at least three months of expenses.
If you are having difficulty making payments when forbearance ends, you may qualify for income-tested repayment plans or other forbearance and deferral options. Ask your loan officer and check out the resources on StudentAid.gov.
MORTGAGE DEBT CAN BE DEFERRED AND NOT FORFEITED
The first coronavirus relief bill, which Congress passed in March 2020, offered protection for borrowers with federally guaranteed mortgages. These include loans backed by Fannie Mae and Freddie Mac as well as FHA, VA, and USDA loans.
Homeowners with FHA, VA and USDA loans have until Feb. 28 to request a 180-day forbearance on federally guaranteed loans. (Currently, there is no deadline for Fannie Mae or Freddie Mac loans.) Borrowers can apply for an extension of 180 days, for a full forbearance of almost a year.
Forbearance does not erase the debt, however, and usually the interest still accrues. In most cases, borrowers can make arrangements to repay missed payments over time or add the payments to the end of the loan.
If you can start making payments again, you should probably do so to avoid paying unnecessary interest. Contact your lender to find out your repayment options. If you can’t make payments when your forbearance expires, ask your lender if they have any additional options in the event of difficulty.
REFUND CREDIT CARDS IF YOU CAN
Americans have paid off their credit card debt during the pandemic, according to the Federal Reserve. At the same time, participation in lender relief programs has skyrocketed. About 2.4% of credit card accounts were in trouble in December, according to credit bureau TransUnion. In contrast, the rate was just 0.007% in December 2019. Hardship programs differ, but credit card issuers can reduce interest rates or payments, suspend payments for a few months, or waive fees delay.
If you can pay off your credit card debt, you probably should. Credit cards tend to have high interest rates, and the payments you make usually free up credit that you can reuse in an emergency.
If you have good credit and a stable income, you could get out of debt faster by using low-interest balance transfer offers or a personal loan. If you don’t have good credit or are having trouble with your bills, a debt management plan from a nonprofit credit counseling agency might help lower your rates and allow you to repay your debt over three to five years. You may also want to consider talking to a bankruptcy attorney about your options.
AUTO LOAN RELIEF IS LIMITED
Auto lenders have also expanded their hardship programs to allow borrowers to defer payments, typically for one to three months. Deferred payments are usually added at the end of the loan, so a 60 month loan would be extended to 63 months.
TransUnion says 2.9% of all auto loans were in a hardship program in December, up from 0.5% a year earlier. For subprime borrowers – those with poor credit – the rate was 9.8%, down from around 1% in December 2019.
Still, serious payment arrears — payments 60 days or more late for loans that weren’t in trouble — rose in December from a year earlier. Missing even one payment can hurt your credit ratings and lead to repossession of your vehicle. If not enough money sells at auction to cover your loan, you could be sued for the difference. Returning keys as part of a “voluntary” repossession has similar consequences: credit damage and potential lawsuit.
If you can resume payments, do so. If you can’t and you owe less than the car’s value, consider selling it or trading it in for a more affordable vehicle. If you owe more than it’s worth, ask the lender if they will restructure the loan to make it more affordable.
This column was provided to The Associated Press by personal finance website NerdWallet. Liz Weston is a NerdWallet columnist, certified financial planner, and author of “Your Credit Score.” Email: [email protected] Twitter: @lizweston.
NerdWallet: 2020 US Household Credit Card Debt Study http://bit.ly/nerdwallet-debt-study