The COVID-19 era has spared few people financially. From job losses and furloughs, hourly cut-backs, and general uneasiness about the future leading to spending cuts, we have all in some way felt the economic burden that the effects of this virus has brought on us.
A large part of many family budgets are loans that we take out in order to afford big ticket items that we couldn’t normally afford to pay at one time. Most households will likely be indebted to banks or lending institutions for some type of loan during this pandemic. With certain economic aid packages that have been passed by congress (and now executive orders by the executive administration) that give certain types of loans forbearance for a period of time, a question that we hear a lot, then, is “Must I keep paying my loan?” We think the better question might be “Should I keep paying my loan?”
Disclaimer: Due to differing rules based on the type and purpose of the loans that you may have, you of course should speak directly to your loan service provider to ensure that the following applies to your type of loan. You should also consult your accountant or financial advisor before making any decisions with regards to payment or non-payment of loans.
DEFINITION OF TERMS
One thing to note before we look at how two types of loans might be affected by COVID-19 rules and regulations is that the words that your loan service providers are using are quite important. What may sound like a “get out of jail free” card might actually be a “you get to go to jail later” card. Let’s take a look at important terms used for your loans.
Loan deferment is a way of stopping loan payments that allows you to ‘defer’ making payments on your loan (or reduce the amount you pay) for a set period of time. During the deferment period, interest on your loan does not accrue to your account—usually because the government agrees to pay that interest for you.
Loan forbearance is another device used to allow you stop making payments on your loans. With forbearance, though, your interest does continue to accrue and is either capitalized or added to a total amount due at the end of your forbearance period. In some cases this will mean that you must pay back the total amount that you didn’t pay at the end of the forbearance period; in other cases your loan provider may allow you to make chunked payments on that total forbearance amount—while you continue to make your regularly scheduled loan payments.
TYPES OF LOANS
Because all types of loans are subject to various rules, regulations, and laws that depend on what type of loan it is, you can’t make assumptions for one type of loan based on what you know of another type. So let’s take a look at two types of loans that you might have and see whether or not you must or should continue to pay it during the COVID-19 economic downturn.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act gave specific aid for certain types of home loans. If you have an FHA-backed mortgage, you would not be foreclosed upon or evicted from your home through August 31 of this year. (By executive order, the Trump administration has recently extended a moratorium on evictions and foreclosures.)
You could request forbearance for your mortgage payments (if you could prove that you were having a financial hardship due to the COVID-19 National Emergency). Beyond the forbearance, you would “not be required to pay a ‘lump sum’ for the total missed payments at the end of the forbearance period.” At the end of your forbearance period, you could choose to make a lump sum payment, or there would be a repayment plan put in place that would help you pay back the full amount.
So while it might be nice to not have payments for a while (or, if you are without a job, a necessity), at the end of your forbearance period you would still have to pay all of that amount back in short order, even if not in one lump sum. Therefore unless you absolutely could not make your payments, it would be a good idea to continue paying towards your mortgage, even if it was not the full payment, so that you could more easily afford to pay the forborne amount at the end.
The CARES Act gave people with federal student loans some assistance in the form of an automatic six-month payment relief (through September 30, 2020). The Trump Administration gave an executive order this past week declaring a deferral of student loan payments and waiving of interest for federally held loans through December 31, 2020. Loans not owned by the U.S. Department of Education do not qualify for this payment break, but you can apply with your loan servicer for a potential break from them.
If you qualify for Public Service Loan Forgiveness (PSLF)—a federal program for those working in the public sector—and you see that you cannot make your necessary payments to count towards your forgiveness total, then according to the CARES Act provisions your suspended payments will be treated as regular payments.
It should also be noted that this forbearance period will not count against your consumer credit score, though this is something you’ll want to check and make sure your loan is being reported correctly on your credit report.
In general, if you can continue to make these school loan payments, it would be a good idea to do so as it will pay down your debt load faster. Another idea is to take the money that you would normally be paying for your loan and invest in a high-yield savings account so that when your loan service provider resumes payments you can pay in one lump sum the amount you didn’t pay from the deferral period with interest earned. But if you can’t afford to make payments as normal, don’t sweat it—this deferral was made for you and you should take advantage of it if you need to!
If you see that you will not be able to return to the same income you had pre-COVID due to a job loss, furlough, or cut hours, you will want to consider an income-driven repayment plan. Income-driven payment plans have payments as a percentage of your ‘discretionary income.’ If you have no income, you will qualify for a $0 payment. If you have questions about this kind of student loan payment plan, give us a call and we’d be glad to help you think through this option.
In conclusion, we know it is hard for many of us right now. We understand what you’re going through and have experience helping people navigate these waters. If you need help deciding on what you should do with regards to paying or waiting to pay your mortgage, student loans, or any other type of loan, please let us know how we can help. We value you and are here to help!