Milford Daily News, The (MA)
A singular crisis has resulted in extraordinary relief opportunities for borrowers. State student loan interest and payments have been suspended. Homeowners can apply for almost a year of mortgage deferral. Credit card issuers and other lenders dramatically expanded hardship programs.
Still, many Americans say they took on more debt over the past year because of the pandemic, NerdWallet’s household debt survey shows.
If you are one of them, or if you have other household debt that has been put on hold, you may not want to rush to repay that money, even if you can. The COVID-19 crisis and its economic ramifications are far from over, so be strategic when dealing with pandemic-related and other debts.
STUDY LOANS ARE STILL ON HOLD
President Joe Biden extended federal student loan deferral until October and during his campaign proposed cutting $ 10,000 in federal student loan debt per borrower. If you could benefit from this, you should consider not making additional payments on the student loan while you wait to see what happens.
Paying back student loans probably shouldn’t be your top priority anyway. More important goals are saving up for retirement, paying off higher-interest debt, and building an emergency fund of at least three monthly expenses.
If you’re struggling to make payments after the deferral expires, you can qualify for income-based repayment plans or other deferral and deferral options. Ask your loan service provider and check out the resources on StudentAid.gov.
Mortgage debt can be moved, not deleted
The first coronavirus relief bill passed by Congress in March 2020 provided protection for borrowers with government-secured mortgages. These include loans backed by Fannie Mae and Freddie Mac, as well as FHA, VA, and USDA loans.
Homeowners on FHA, VA, and USDA loans have until February 28 to apply for a 180-day federal loan deferral. (There is currently no deadline for Fannie Mae or Freddie Mac loans.) Borrowers can apply for a 180 day extension, which is almost a year in total.
However, forbearance does not pay off debts, and interest rates usually pile up. In most cases, borrowers can make arrangements to repay the defaulted payments over time or add the payments to the end of the loan.
If you can make payments again, you should probably do so to avoid unnecessary interest. Contact your lender to learn more about your repayment options. If you are unable to make payments after your forbearance has expired, ask your lender if they have additional hardship options.
Liz Weston is a NerdWallet columnist
PAY FOR CREDIT CARDS IF YOU CAN
According to the Federal Reserve, Americans paid off their credit card debt in the pandemic. At the same time, participation in compassionate use programs for lenders has risen sharply. Around 2.4% of credit card accounts were in hardship in December, according to the TransUnion credit reporting agency. In contrast, the rate was only 0.007% in December 2019. Hardship programs differ, but credit card issuers can lower interest rates or payments, suspend payments for a few months, or waive late fees.
However, if you can pay off your credit card debt, you should probably do so. Credit cards usually come with high interest rates, and the payments you make usually free up credit that you can use again in an emergency.
If you have good credit and a stable income, you can get rid of debt faster by taking advantage of low-interest credit transfer offers or a personal loan. If you don’t have good credit scores or are struggling with your bills, a debt management plan from a nonprofit credit counseling agency can help lower your interest rates and allow you to pay off your debts over three to five years. You may also consider speaking to a bankruptcy lawyer about your options.
AUTOMATIC LOAN RELIEF IS LIMITED
Car lenders also expanded their hardship programs to allow borrowers to defer payments, usually for one to three months. The deferred payments are usually added to the end of the loan, so a 60 month loan would be extended to 63 months.
According to TransUnion, 2.9% of all car loans were in a hardship program in December, compared with 0.5% a year earlier. For subprime borrowers – those with poor creditworthiness – the interest rate was 9.8%, compared to around 1% in December 2019.
Nevertheless, there was an increase in serious payment defaults in December compared to the previous year – 60 days or more overdue loans without a hardship case. Missing even a single payment could damage your creditworthiness and result in repossession of your vehicle. If it doesn’t sell at auction for enough money to cover your loan, you could be sued for the difference. Returning the keys in a “voluntary” repossession has similar consequences: credit damage and possible legal action.
If you can resume payments, do so. If you can’t owe less than the car is worth, consider selling it or trading it in for a cheaper vehicle. If you have more debt than it’s worth, ask the lender if they will restructure the loan to make it more affordable.
Liz Weston is a columnist for NerdWallet, a certified financial planner, and the author of Your Credit Score. E-mail: [email protected]. Twitter: @lizweston.