Repayment

Are 0% Interest Student Loans Better Than $10K Cancellation?

Posted on by Cecilia Clark

Cancellation is the most popular proposal to address student loan debt, but it isn’t the only one out there. With the interest-free student loan payment pause in its third year, some wonder if 0% interest on student loans is a better answer.

“I think this COVID pause has really illustrated — hopefully for policymakers but definitely for consumers — that the interest is what’s really killing people,” says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors.

She’s talked to many borrowers who say they wouldn’t turn down forgiveness but would much rather have a cut in the interest rate.

The Biden administration is expected to announce $10,000 in cancellation to federal student loan borrowers earning less than $150,000 for individuals and $300,000 for couples. This aligns with the president’s campaign promises but falls short of what some experts think is necessary.

Lodriguez Murray, United Negro College Fund senior vice president for public policy and government affairs, encourages “the administration to go bigger and bolder.”

“When there is a way you can reset the course of history for certain populations, you should,” Murray says.

Tomas Campos, CEO and co-founder of debt optimization software Spinwheel, thinks 0% student loan interest could be a realistic solution. Student loan debt “impacts half of American households. They may not be in debt themselves, but they see their loved ones struggling with it,” says Campos.

According to a recent NPR poll, the majority of the general public supports partial student loan relief, but that support decreases with higher amounts of cancellation.

Here’s how eliminating student loan interest could work based on two existing proposals aimed at borrowers with problematic long-term debt.

Two plans for 0% interest

LOAN Act

Last summer, U.S. Sen. Marco Rubio, R-Florida, reintroduced the Leveraging Opportunities for Americans Now Act. This act, first introduced in May 2019, calls for the government to disburse all federal student loans at 0% interest and replaces interest charges with a one-time origination fee.

Under the LOAN Act, undergraduate student loans would carry a 20% origination fee, and PLUS loans would carry 35%. These fees would be added to the total principal amount and paid back over the life of the loan.

Borrowers would automatically be placed in an income-driven repayment plan but would have the option to select the standard 10-year repayment plan. Those who repay their loan early would be refunded some of the origination fee.

If a student borrows $27,000 in federal loans at the 2022-23 interest rate of 4.99%, their payment would be about $286 a month for 10 years, with $34,349 repaid in total. With a 20% origination fee and no interest, that borrower would have $270 monthly payments with a $32,400 total repayment.

Low-income borrowers who enter an income-driven repayment plan would benefit most. According to a NerdWallet analysis, a borrower with $27,000 in debt and a starting annual salary of $30,000 would pay nearly $42,000 by the time income-driven repayment forgiveness kicked in. With the Rubio proposal, that borrower may pay about $9,600 less.

Zero-Percent Student Loan Refinancing Act

Sen. Sheldon Whitehouse, D-Rhode Island, introduced the Zero-Percent Student Loan Refinancing Act in February of this year. Rep. Joe Courtney, D-Connecticut, also introduced a version of the bill to the House.

The Zero-Percent Student Loan Refinancing Act would automatically refinance all loans under the federal Direct Loan program to 0% interest. It would also give borrowers with Federal Family Education Loans, Perkins loans and Public Health Service Act loans the option to refinance to 0% interest.

Borrowers with private student loan debt would be eligible for the 0% refinance, too, according to email statements from Meaghan McCabe, a senior communications advisor with Whitehouse’s office

This proposal was introduced to help student loan borrowers recover from pandemic-induced financial strain and mounting interest totals that have the potential to exceed the original principal loan balance. The proposal would allow borrowers to refinance at 0% through 2024.

Borrowers would be eligible to refinance anytime during the open window of the program, even if they are still in school, according to McCabe. Under this proposal, a student who refinanced immediately and had $27,000 in debt at 4.99% interest would save about $7,349 over a 10-year term.

What can you do now?

The existing proposals are a long way from coming to a vote in either house of Congress, and there isn’t even consensus on whether 0% is the ultimate answer to the student debt crisis.

Interest-free student loans “can be coupled with other actions, really, but it’s not enough to make a real difference,” says Murray.

Mayotte says a reduced interest rate, maybe 1%, across student loans may be a better solution, as borrowers may not take 0% debt seriously. She also believes student loans with reduced interest rates have a better chance of garnering bipartisan support in a divided Congress.

Meanwhile, federal student loans are scheduled to return to repayment in September, and that means interest charges will also resume.

Borrowers should plan for repayment. If you think you’ll struggle, contact your servicer to discuss your options, such as reduced payments or halting payments altogether through forbearance. No matter how you proceed, however, interest charges will continue adding up.

As for interest-free or reduced-interest student loans, Mayotte urges borrowers to make their voices heard. She says, “I think if more consumers start writing their members of Congress asking for that, we might get some more attention and more legs to it.”

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Cecilia Clark writes for NerdWallet.

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With Student Loan Payments Set to Return, Here’s How to Get Help

Posted on by Anna Helhoski

For 42.9 million student loan borrowers, it’s been 18 months without a payment. That ends in October — ready or not.

The interest-free federal student loan payment pause, known as a forbearance, was extended three times after it initially went into effect in March 2020 as a way to help reduce the financial blow many borrowers experienced as a result of the pandemic.

But with payments set to resume in a few months, servicers — the companies that manage student loan payments — are already fielding thousands of calls a day from borrowers seeking student loan help, according to Scott Buchanan, executive director of the Student Loan Servicing Alliance, a nonprofit trade organization for student loan servicers.

Time is running out for both servicers and loan borrowers to prepare for repayment.

While Education Secretary Miguel Cardona has indicated it’s not “out of the question” to extend the loan forbearance beyond Sept. 30, for now borrowers should be prepared for bills to come due sometime in October (they’re supposed to be notified at least 21 days prior to their exact billing date).

Talk with your servicer now

Servicers are expecting borrower demand for help to increase and may have trouble keeping up. The repayment system has never been turned off before, so no one is sure what restarting it simultaneously for 42.9 million people will look like.

“We don’t have any guidance from the department [of Education] about what a resumption strategy would look like,” says Buchanan. “We are in the time frame where those plans need to be communicated; it cannot wait.”

Richard Cordray, the newly appointed head of the Education Department’s federal student aid office, told The Washington Post for a story on June 11 that restarting payments was “a very complex situation” and said the office planned to provide more information to servicers soon. He also said the department planned to hold the servicers accountable by setting rigorous performance benchmarks.

Despite the uncertainty, if you’re worried about your ability to make payments, there’s no downside to contacting your servicer now to beat the rush, says Buchanan. Ask about your best options to manage payments, depending on your situation.

If you’re not sure who your servicer is, log in to your My Federal Student Aid account to find out. To ensure you don’t miss any notifications, check that your contact information is up to date on your loan servicer’s website and in your StudentAid.gov profile.

Know your repayment options

“Your options are not ‘pay or default,’” says Megan Coval, vice president of policy and federal relations at the National Association of Student Financial Aid Administrators. “There are options in between for lowering payments. Nobody, including the federal government, wants to see you go into default.”

Default happens after roughly nine months of late federal loan payments. It can result in a damaged credit score, wage garnishment, withheld tax refunds and other financial burdens.

  • If payments will be a hardship: Enrolling in an income-driven repayment plan sets payments at a portion of your income, which could be $0 if you’re out of work or underemployed. Or you could opt to pause payments (with interest collecting) using an unemployment deferment or forbearance.
  • If you were delinquent before the pause: Your loans will be reset into “good standing.” Making monthly payments on time will help you retain that status. But if you think you might miss a payment or you don’t think you can afford payments altogether, contact your servicer about enrolling in an income-driven plan.
  • If you were in default before the pause: Contact your loan holder or the education department’s default resolution group to find out how to enter into loan rehabilitation and get back into good standing.

Find a legit resource

Servicers may be your first point of contact, but they don’t have to be your last. You may have other needs your servicer isn’t providing, such as financial difficulty beyond your student loans or legal advice.

Cash-strapped borrowers can find legitimate student loan help for free with organizations such as The Institute of Student Loan Advisors. Other student loan help, such as a credit counselor or a lawyer, will charge fees. You can find reputable credit counselors through organizations such as the National Foundation for Credit Counseling.

Financial planners can also help, but it’s best to look for one with student loan expertise, such as a certified student loan professional.

You can find legal assistance, including advice on debt settlement and pursuing bankruptcy, with lawyers who specialize in student loans or with legal services in your state as listed by the National Consumer Law Center.

If your issue is with your servicer, contact the Federal Student Loan Ombudsman Group, which resolves federal student aid disputes. You can also file a complaint with the Federal Student Aid Feedback Center or the Consumer Financial Protection Bureau.

Avoid scammers

Legitimate student loan help organizations won’t seek you out with offers of debt resolution through unsolicited texts, emails or phone calls. Most importantly, you don’t have to pay anyone to apply to consolidate your debt, enter into an income-driven repayment plan or apply for Public Service Loan Forgiveness.

“The hard and fast rule is that applying for [consolidation and repayment] programs is free,” says Kyra Taylor, staff attorney focusing on student loans at the National Consumer Law Center. “I think when people realize what they can do for free, it makes it easier for them to spot scams.”

And don’t fall for any company that promises to forgive your student loans or wait for the government to do so — thus far, no executive action from President Joe Biden or legislation from Congress has come to pass.

Anna Helhoski writes for NerdWallet. Email: anna@nerdwallet.com. Twitter: @AnnaHelhoski.

The article With Student Loan Payments Set to Return, Here’s How to Get Help originally appeared on NerdWallet.

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What Would It Take to Solve the Student Debt Crisis?

Posted on by Anna Helhoski

The possibility of federal student loan forgiveness grabs all the headlines. But experts say no single policy — not even wiping the slate clean for millions of borrowers — solves the root causes of the nation’s $1.74 trillion student loan debt crisis.

That debt has been fueled by decades of wages not keeping up with the rising cost of college. And unless wages increase and college costs decrease, students will still need to take on debt to complete degrees, and they’ll face greater difficulty repaying loans.

“There are no $1.7 trillion silver bullets,” says Seth Frotman, executive director of the Student Borrower Protection Center, a nonprofit advocacy organization.

So what could work? It’ll take more than a headline-grabbing wipeout of student debt.

Frotman says, in addition to canceling debt, he would prioritize efforts to make college more affordable and to reform the borrowing and repayment systems. Michele Streeter, senior policy analyst at The Institute for College Access and Success, says student loans remain an important college access tool for students, but forgiveness and repayment programs should be easier to access and automated whenever possible.

As a new crop of students gets ready to borrow for college and multiple generations of borrowers grapple with debt, experts weigh in on possible solutions.

Forgive student loan debt

Broad forgiveness — around $10,000, for example — could help the most vulnerable borrowers: those who never graduated and lack the bigger paychecks that typically come with a degree to pay off the debt they acquired along the way.

Experts diverge on whether there should be broad forgiveness. But if it does happen, they agree future debt accumulation must be addressed.

“Until somebody can come up with a proposal for what happens on day two and everyone starts borrowing again, that will be one major hurdle to any level of forgiveness,” says Carlo Salerno, vice president for research at CampusLogic, a developer of college financial aid management tools.

Streamline existing forgiveness programs

There’s too much red tape inherent to existing forgiveness programs, experts say. Salerno calls it a “bureaucracy and paperwork crisis.”

These programs have low rates of acceptance: As of November 2020, 6,493 Public Service Loan Forgiveness applications, or 2.2%, were approved, and so far just 32 borrowers total have received income-driven repayment forgiveness (though most won’t be eligible until 2035).

Democrats in Congress have suggested making all federal student loans and repayment plans eligible for PSLF, waiving restrictions for forgiveness and automatically qualifying borrowers.

Cut or lower interest rates

Federal student loan borrowers haven’t had to make payments since March 13, 2020, and they won’t again until Oct. 1. During this pause, zero interest is accruing. That means loans won’t grow and, if you can afford to make payments, you can pay off your debt faster.

Making zero interest permanent or lowering interest on existing debt could help borrowers pay off their debt without growing the principal, says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors.

Many borrowers Mayotte hears from say their biggest gripe is growing interest.

“They say, ‘I feel like I should pay (my loans) back, but I don’t feel like I’m on a level playing field because of the interest,’” Mayotte says.

Condense income-driven repayment

Income-driven repayment plans, federal options that set student loan payments at a portion of a borrower’s income, are a strong safety net. But experts say the four income-driven options — in addition to the three other federal repayment plans — should be streamlined into one new program. Some suggest automating enrollment.

“There’s no rhyme or reason for the variety of programs that exist in this space other than they were developed over time,” says Beth Akers, resident scholar at the American Enterprise Institute, a conservative public policy think tank, where she focuses on the economics of higher education. “We need to simplify the safety net for students and make it so simple that they can understand it exists and what benefits it can provide for them.”

Wesley Whistle, senior advisor for policy and strategy at New America, a left-of-center public policy think tank, says automatic enrollment into an IDR plan could benefit delinquent or defaulted borrowers, but is concerned about auto-enrolling students right out of college and its effect on their ability to repay the principal. For many, payments may not even cover interest.

“Even working full time at a minimum wage job, you’re not making enough to knock into your principal,” says Whistle, who specializes in higher education policy. That could leave borrowers still paying student loans 20-25 years into the future.

Make college tuition-free

Tuition-free college at the associate’s degree level, as President Joe Biden has proposed, could particularly benefit low-income students who otherwise wouldn’t attend college and could reduce overall borrowing. College affordability advocates are calling for tuition-free four-year programs as well.

However, experts agree tuition-free programs will still require borrowers to take on debt to cover living expenses — on or off campus.

“I don’t think it’s a terrible idea, but I don’t think it’s a game changer,” Akers says, adding she thinks expanding existing Pell Grant programs could have a stronger effect on affordability.

Expand Pell Grants

Pell Grants originally covered around 80% of college costs, but today they cover less than 28%, according to The Institute for College Access and Success.

Lawmakers and experts say Pell Grants, targeted to low-income students, should be doubled from their current maximum of $6,495 to better meet the cost of college for students with financial need.

“The program is super well-targeted,” says Streeter of TICAS. “Even if you were to double the maximum grant, that targeting is still in place, and I think that’s why it is so popular and has a lot of bipartisan support.”

Advocates also argue eligibility should extend up the income ladder to include students in middle-income brackets who still need financial aid.

This article was written by NerdWallet and was originally published by The Associated Press. 

Anna Helhoski writes for NerdWallet. Email: anna@nerdwallet.com. Twitter: @AnnaHelhoski.

The article What Would It Take to Solve the Student Debt Crisis? originally appeared on NerdWallet.

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The Pros and Cons of Debt Consolidation

Posted on by Jackie Veling

If you have multiple streams of debt, like high-interest credit cards, medical bills or personal loans, debt consolidation can combine them into one fixed monthly payment.

Getting a debt consolidation loan or using a balance transfer credit card can make sense if it lowers your annual percentage rate. But refinancing debt has pros and cons — even at a lower rate.

Pros of debt consolidation

You could receive a lower rate

The biggest advantage of debt consolidation is paying off your debt at a lower interest rate, which saves money and could eliminate the debt faster.

For example, if you have $9,000 in total debt with a combined APR of 25% and a combined monthly payment of $500, you’ll pay $2,500 in interest over about two years.

But if you were to take out a debt consolidation loan with a 17% APR and a two-year repayment term, the new monthly payment would be $445, and you would save $820 in interest. The money you save on the lower monthly payment could also go toward paying off the loan earlier.

If you qualify for a balance transfer card, you would pay zero interest during the promotional period, which can last up to 18 months. You will likely also pay a 3% to 5% balance transfer fee.

Use a debt consolidation calculator to see your total balance, total monthly payment and combined interest rate across debts.

You’ll have just one monthly payment

Instead of keeping track of multiple monthly payments and interest rates, consolidating lets you combine the debt into one payment with a fixed interest rate that won’t change over the life of the loan (or during the promotional period, in the case of a balance transfer card).

But it’s not just about simplifying your repayments. Consolidating can give you a clear and motivating finish line to being debt-free, especially if you don’t have a debt payoff plan in place.

You could build your credit

Applying for a new form of credit requires a hard credit inquiry, which can temporarily lower your score by a few points.

However, if you make your monthly payments on time and in full, the overall net effect should be positive, especially if you’re consolidating credit card debt.

Paying off credit card balances lowers your credit utilization ratio, which is one of the biggest factors that determines your score.

Cons of debt consolidation

You may not qualify for a low rate

Balance transfer cards can be hard to qualify for and typically require good to excellent credit (690 or higher on the FICO scale).

Debt consolidation loans are more accessible, and there are loans tailored for bad-credit applicants (629 or lower on the FICO scale). But borrowers with the highest scores usually receive the lowest rates.

Unless the lender can offer you a lower rate than your current debts, debt consolidation usually isn’t a good idea. In this case, consider another debt payoff strategy, like the debt avalanche or debt snowball methods.

Borrowers looking to consolidate with a loan can prequalify with some lenders to see potential rates without affecting their credit scores.

You could fall behind on payments

Missing payments toward the new debt means that you could end up in a worse position than when you started.

For example, if you fail to pay off your balance transfer card within the zero-interest promotional period, you’ll be stuck paying it at a higher APR — potentially higher than the original debt.

If you fall behind on a consolidation loan, you could rack up late fees, and the missed payments would be reported to the credit bureaus, jeopardizing your credit scores.

Before consolidating, make sure the new monthly payment fits comfortably in your budget for the entirety of the repayment period.

You haven’t addressed the root problem

Though consolidation is a helpful tool, it isn’t a sure fix for recurring debt and doesn’t address the behaviors that led to debt in the first place.

If you struggle with overspending, consolidation could be a risky choice. By taking out a loan to pay off credit cards, for example, those cards will have a zero balance again. You might be tempted to use them before the new debt is paid off, digging you into an even deeper hole.

If you have too much debt, you may be better off consulting a credit counselor at a reputable nonprofit who can help set up a debt management plan, versus trying to tackle it on your own.

Jackie Veling writes for NerdWallet. Email: jveling@nerdwallet.com.

The article The Pros and Cons of Debt Consolidation originally appeared on NerdWallet.

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How to Prioritize Debt Payments in the Pandemic

Posted on by Liz Weston

A singular crisis has led to extraordinary relief options for borrowers. Interest and payments have been paused on federal student loans. Homeowners can request nearly a year of mortgage forbearance. Credit card issuers and other lenders dramatically expanded hardship programs.

Still, many Americans say they took on more debt last year because of the pandemic, according to NerdWallet’s household debt survey.

If you are one of them, or if you have other household debt that’s been put on hold, you may 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 want to be strategic when dealing with pandemic-related and other debt.

Student loans are still on hold

President Joe Biden extended federal student loan forbearance until October and during his campaign proposed canceling $10,000 in federal student loan debt per borrower. If you could benefit, consider not making any extra student loan payments while you wait to see what happens.

Paying off student loans probably shouldn’t be your top priority anyway. More important goals include saving for retirement, paying off higher-interest-rate debt and building an emergency fund of at least three months’ worth of expenses.

If you have trouble making payments when forbearance ends, you may qualify for income-driven repayment plans or further forbearance and deferral options. Ask your loan servicer and check out the resources at StudentAid.gov.

Mortgage debt can be postponed, not erased

The first coronavirus relief bill, which Congress passed in March 2020, offered protection for borrowers with federally backed mortgages. Those 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 backed loans. (Currently, there’s no deadline for Fannie Mae or Freddie Mac loans.) Borrowers can request an extension of 180 days, for a total forbearance of nearly a year.

Forbearance doesn’t erase debt, however, and typically interest still accumulates. In most cases, borrowers can make arrangements to pay back the missed payments over time or add the payments to the end of the loan.

If you can resume making payments, you probably should do so to avoid paying unnecessary interest. Contact your lender to learn about your repayment options. If you can’t make payments when your forbearance expires, ask your lender if it has any additional hardship options.

Pay down credit cards if you can

Americans have been paying down their credit card debt in the pandemic, according to the Federal Reserve. At the same time, participation in lender hardship programs has soared. About 2.4% of credit card accounts were in hardship status in December, according to the credit bureau TransUnion. In contrast, the rate was just 0.007% in December 2019. Hardship programs differ, but credit card issuers may lower interest rates or payments, pause payments for a few months or waive late fees.

If you can pay down your credit card debt, however, you probably should. Credit cards tend to carry high interest rates, and the payments you make typically free up credit that you can use again in an emergency.

If you have good credit scores and steady income, you could get out of debt faster by using low-interest-rate balance transfer offers or a personal loan. If you don’t have good credit or you’re struggling with your bills, a debt management plan from a nonprofit credit counseling agency could help lower your rates and allow you to pay off your debt over three to five years. You also may want to consider talking with a bankruptcy attorney about your options.

Auto loans relief is limited

Auto lenders also expanded their hardship programs to allow borrowers to defer payments, typically for one to three months. The deferred payments are usually added on to 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 compared with 0.5% a year earlier. For subprime borrowers — those with poor credit — the rate was 9.8%, compared with about 1% in December 2019.

Still, serious delinquencies — payments that were 60 days or more overdue for loans that weren’t in hardship status — rose in December compared with a year earlier. Missing even one payment can hurt your credit scores and lead to your vehicle being repossessed. If it doesn’t sell for enough money at auction to cover your loan, you could be sued for the difference. Handing back the keys in a “voluntary” repossession has similar consequences: credit damage and a potential lawsuit.

If you can resume payments, do. If you can’t and owe less than the car is worth, consider selling it or trading it for a more affordable vehicle. If you owe more than it’s worth, ask the lender if it will restructure the loan to make it more affordable.

This article was written by NerdWallet and was originally published by the Associated Press.

Liz Weston writes for NerdWallet. Email: lweston@nerdwallet.com. Twitter: @lizweston.

The article How to Prioritize Debt Payments in the Pandemic originally appeared on NerdWallet.

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Finances Unscathed by Pandemic? Seize the Moment and Tackle Debt

Posted on by Amrita Jayakumar

After close to a year of living with the pandemic, the effect on people’s finances has varied widely. If you’re in the fortunate position of still having a steady income, you can plan for what lies ahead in 2021.

A good first step is dealing with debt. Maybe you leaned on credit cards to get through the ups and downs of 2020 or you’re wondering how to get a head start on student loan payments once the forbearance period ends. Perhaps you’re feeling the aftereffects of holiday spending — 75% of holiday shoppers said they planned to put 2020 gift purchases on a credit card, NerdWallet’s 2020 holiday shopping report found.

The strategies for paying down debt aren’t different in a pandemic, but keeping yourself motivated in stressful times may take a little more effort. Don’t beat yourself up; just get started and do your best.

Help yourself — and others — with a budget

First, understand your cash flow.

NerdWallet’s 2020 household debt study found that 14% of U.S. adults said their household financial situation had gotten better since the onset of the pandemic, and 43% said their household financial situation has stayed about the same.

If you’re doing OK, you’re probably feeling grateful when so many others are going through a hard time. Making a budget lets you plan how much you can put toward debt and savings — and what you can donate to help your community.

You might have great intentions, but putting everything down on paper will help you visualize how much you actually have left over, says Elaina Johannessen, program director of debt management operations and support at LSS Financial Counseling in Duluth, Minnesota.

“The best way, not the most fun way, is creating that good, old-fashioned budget,” she says.

The 50/30/20 budget is a simple way to think about your money:

  • Use 50% of your take-home pay for essentials, which include shelter, food, utilities and paying the minimums on all your debts. Your budget should earmark money for regular bills as well as expenses you know will pop up during the year, Johannessen says, such as vet bills or insurance payments.
  • Thirty percent of your after-tax income goes toward “wants,” which covers all your discretionary spending, including giving back. If you know which causes you want to support, websites like Charity Navigator and GuideStar provide information on nonprofits that best serve those causes.
  • Finally, 20% of your income goes toward savings and extra debt payments. If the pandemic has taught us anything, it’s the importance of having a rainy day fund. “Even though you have the means to pay off your debt, if you don’t have savings, that needs to be a focus,” Johannessen says. A savings cushion will let you navigate bumps without adding more debt.

Johannessen encourages anyone thinking about paying down debt to also take advantage of a free budgeting session with a nonprofit credit counselor.

Know your debt numbers

Next, understand how much you owe.

From your budget, extract a list of all your debt accounts, the interest rate on each and how long it would take to pay off each balance at your current pace. You can use a debt calculator to figure out that timeline.

This exercise will help you prioritize your debts and pick a repayment strategy that works for you.

Pick a debt repayment strategy

Once you know your debt numbers and cash flow, it’s time to pick a strategy.

There are two popular methods of paying down debt: the debt snowball and the debt avalanche. In both methods, you pick one debt to focus extra payments on, while paying at least the minimums on all the others.

Using debt snowball, you knock off debts from the lowest balance to the highest. Once you’re done with the smallest debt, you roll that amount into payments on the next-highest debt amount. This strategy gives you quick wins to stay motivated.

Using debt avalanche, you pay off the debt with the highest interest rate first, which can reduce how much interest you pay overall and may get you debt-free faster.

Amrita Jayakumar writes for NerdWallet. Email: ajayakumar@nerdwallet.com. Twitter: @ajbombay.

The article Finances Unscathed by Pandemic? Seize the Moment and Tackle Debt originally appeared on NerdWallet.

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Get Ahead of Holiday Debt With a Payoff Plan

Posted on by Sean Pyles

In a holiday season that many of us will spend apart from loved ones, gift-giving might feel even more important than usual. After all, if you can’t travel to see family, at least you can see them unwrap gifts over a video call, right?

And just as many families will use a video service for holiday celebrations this year, many will also turn to credit cards to cover their expressions of love. Three-quarters of holiday shoppers are planning to use credit cards to purchase gifts this year, according to a NerdWallet survey of 2,049 U.S. adults conducted online by The Harris Poll.

Using credit cards can be a great way to earn rewards or get cash back, but make sure you know how to dig out of the debt you ring up. Otherwise, you might be still paying off the debt late into next year, something 33% of 2019 holiday shoppers who used credit cards said they were still doing when surveyed in September.

Here’s how to handle holiday debt.

Take stock of what you owe — and what you can pay

First, catalog your holiday debt. Log into each credit account and note the balance and interest rate. Consider creating a simple spreadsheet or using a debt tracker to keep accounts organized. If you have debt that’s not on a credit card, such as a shopping loan from a company like Klarna, list that, too.

With your debts sorted, turn to your budget. The 50/30/20 budget is an easy template. With this approach, half of take-home pay goes toward necessities, like housing and groceries. Then, 30% goes toward wants, like takeout or a nice bottle of Champagne to celebrate bidding farewell to 2020 on New Year’s Eve. Lastly, 20% of your income goes toward debt and savings.

As you hash out your budget, pin down how much money you can allocate toward debt each month. Divide the total debt by that amount to estimate how fast you can rid yourself of debt, keeping in mind that accruing interest can increase the balances.

Focusing on what you can pay monthly helps make your debt more manageable, says Kathleen Burns Kingsbury, a Vermont-based wealth psychology expert who helps people understand the personal factors of money decisions.

“Ask what you can reasonably pay off each week or each month and really work at achieving it,” Burns Kingsbury says. “From a psychological standpoint, this helps you feel a sense of success, and the more successful you feel, the more motivated you are to continue that behavior.”

Find your payoff path

Your best route to resolving holiday debt depends on your cash flow, credit score and personal preferences. Here are a few:

Pay off the full balance with the first statement

If you have the cash, this is the fastest way to deal with debt — and the cheapest, since you avoid paying interest. According to the NerdWallet shopping survey, 35% of holiday shoppers who added credit card debt in 2019 took this approach.

Roll a snowball or kick off an avalanche

The “debt snowball” and “debt avalanche” are two popular debt payoff methods. Which is right for you depends on your financial priorities.

With the debt snowball method, you focus on paying off the smallest balance first, then roll the amount you were paying on that first debt into the next largest. The amount you’re paying on the focus debt keeps growing, like a snowball rolling downhill. You might choose this if you need the early wins from paying off the first accounts to keep you motivated.

The debt avalanche method may be best if you want to pay as little in interest as possible. With this route, you prioritize paying off the debt with the highest interest rate first, regardless of balance size. Again, when that first debt is done, you put the amount you were paying on that into the next highest interest account, repeating until you’re debt-free.

Consider a balance transfer card

To avoid costly credit card interest, look into taking out a balance transfer credit card with a 0% APR promotional period, says Mike Cocco, an Equitable financial adviser based in Nutley, New Jersey.

“Once you have that, you’re eliminating interest, which can allow you to pay off debt a lot quicker,” Cocco says. “Then, be cognizant of when the 0% APR period runs out and work backwards to create a reverse Christmas Club for paying off your debt. If you have $1,000 on the card and 12 months interest-free, you have to pay at least $83 a month.”

To get a 0% balance transfer offer, you’ll need good to excellent credit. In general, that means a score of 690 or higher, although credit scores alone don’t guarantee approval. Issuers will look at your income, existing debts and other information.

Regardless of which debt payoff method you choose, the important thing is to find a plan and commit to it. Taking decisive action to resolve your debt can ensure you are debt-free faster — and maybe let you start building up savings for the 2021 holiday season.

Sean Pyles writes for NerdWallet. Email: spyles@nerdwallet.com. Twitter: @SeanPyles.

The article Get Ahead of Holiday Debt With a Payoff Plan originally appeared on NerdWallet.

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Read This Before You Refinance Federal Student Loans

Posted on by Ryan Lane

Refinancing student loans at a lower interest rate can put more money in your pocket. With federal student loan bills restarting soon and refi rates near historic lows, it might seem like the perfect time to take this step.

But even if you qualify for refinancing, it won’t always make sense if you have federal student loans — and most borrowers do. Ask yourself the following to figure out if refinancing now is right for you.

What’s the latest on the payment pause?

Most federal student loan payments are paused interest-free until Jan. 31. Various members of Congress have proposed multiple extensions of this forbearance, with some lasting until September, but the long-term fate is currently uncertain.

Until there’s a definitive answer, don’t refinance federal student loans.

Refinancing replaces your existing loans with a new private loan. That loan won’t qualify for the federal forbearance. No matter how good a lender’s rate offer is, it won’t beat 0% interest.

If your goal is to pay off loans fast, stick with the forbearance for however long it lasts and make payments directly on your principal balance.

Do you work in public service?

Public service workers should steer clear of refinancing federal loans.

If you can qualify for an existing forgiveness program — like Public Service Loan Forgiveness — keep your government loans. You’ll usually pay the least overall if you get loan forgiveness.

Is your job at risk?

Wait to refinance federal loans if you think you could lose your job or have your hours reduced in the upcoming months.

Even if your employment feels rock solid, look at all your financial obligations — like rent and car payments — before refinancing. If your income changes, could you still afford everything?

Federal student loans have options like unemployment deferments and income-driven repayment plans. These can help keep payments manageable if your situation shifts.

Are you waiting on loan cancellation?

President-elect Joe Biden campaigned on forgiving $10,000 in federal student loan debt for each borrower. Some members of Congress want to go further: canceling $50,000 or all student debt.

How should these proposals affect your decision-making? Start with what Biden has supported, which seems like less of a long shot, and look at how much you owe:

  • If it’s $10,000 or less. Wait to see what happens; refinancing isn’t as huge of a money-saver if your balance is small. Make the required payments (if any) while you wait so you can avoid unnecessary interest, late fees or damage to your credit.
  • If it’s more than $10,000. Refinance some of your loans, but keep your federal loan balance as close to $10,000 as possible. This will maximize your savings from both potential cancellation and refinancing.

If you have one federal loan only — like a consolidation loan — it may not be possible to partially refinance it; ask the lender for its policy. In that case, refinancing will make more sense the larger your balance is.

For example, say you owe $100,000 at 7% interest. By refinancing at 4%, your monthly bills would decrease by $149 and you’d pay $17,836 less overall, assuming a 10-year repayment plan.

If you wait to refinance, you’ll miss out on some of those savings. Weigh that against your faith that loan cancellation will happen and the fact that, until a program’s details are revealed, no one knows who will get forgiveness — if anyone does.

Do you also have private student loans?

This decision is simpler. Private loans don’t qualify for existing government programs and wouldn’t be eligible for federal loan cancellation.

If you can qualify for a lower interest rate, there’s little downside to refinancing private student loans.

Ryan Lane is a writer at NerdWallet. Email: rlane@nerdwallet.com.

The article Read This Before You Refinance Federal Student Loans originally appeared on NerdWallet.

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Federal Borrowers Get to Skip Another Student Loan Payment

Posted on by Anna Helhoski

Millions of student loan borrowers who haven’t had to make a payment since the pandemic shut down the nation last winter just got an additional reprieve.

The payment pause, known as a forbearance, began March 13 as part of the original coronavirus relief package and has now been extended twice by the Trump administration, most recently through Jan. 31.

The pause has provided around 33 million borrowers with an interest-free respite from payments, preventing delinquency and subsequent default among those struggling to meet payments as the economy buckled.

Betsy Mayotte, president and founder of The Institute of Student Loan Advisors, says kicking the can down the road will only help borrowers. “Borrowers pursuing [Public Service Loan Forgiveness] get an extra free month toward their total,” she says. “For borrowers in default pursuing loan rehabilitation, it’s another free month. For borrowers getting anxious about being able to afford payments when the waiver is lifted, it’s more time to determine their strategy.”

Despite the fact that the economy hasn’t recovered from the ongoing pandemic (the U.S. unemployment rate in November remained nearly twice as high as in February, at 6.7%, according to the most recent data from the Bureau of Labor Statistics), borrowers can expect their bills to arrive again and autopayments to resume after Jan. 31.

“I think that should be petrifying for everybody,” says Seth Frotman, executive director of the Student Borrower Protection Center. “There is tremendous concern about what’s happening in Washington across the board in terms of land mines and fires being left in the [presidential] transition, but for those of us who have watched this closely, the idea of tens of millions of borrowers’ accounts being turned on in a few short weeks is particularly troubling.”

Will the forbearance be extended again?

Borrowers should plan for the worst and hope for the best when it comes to expecting an additional extension once President-elect Joe Biden takes office, Mayotte says.

“To me it’s an indicator that if Congress hasn’t done anything by the time the waiver ends, Biden probably will do something after he is inaugurated. If they didn’t have that feeling there they wouldn’t have extended by just a month,” says Mayotte.

Biden could act as early as Jan. 20, Inauguration Day, but has not specifically said a forbearance extension is among his plans. Broad loan forgiveness is, but student loan policy experts say not to bank on that happening quickly, if at all.

Legislatively, efforts by House Democrats to extend the forbearance through Sept. 30, 2021, have stalled. Another relief bill could include longer extension of the forbearance; no detailed viable plan has yet emerged.

For now, expect payments to restart sometime after Jan. 31.

What can borrowers expect in the new year?

“The situation lends itself to confusion. I’m not sure how to get out of that,” says Scott Buchanan, executive director of Student Loan Servicing Alliance. “We try to be careful about our communication.”

When your payments restart, Buchanan says:

  • Expect your payment date to remain the same as before.
  • If you are already enrolled in autopay, you will receive a notice before a payment is debited.
  • Borrowers making payments for the first time should watch their inboxes and mailboxes for notice of their new billing date.

“What we’ve been working hard to do is to make this as seamless as possible for those people who are used to it,” Buchanan says, noting the loan servicing system is not one that was meant to turn off and on (and, potentially, off and on again).

What’s especially troubling about payments restarting en masse is the belief expressed by the Federal Student Aid office in a recent report that it and its “servicers will face a heavy burden in ‘converting’ millions of borrowers to active repayment at the same time, with a certain proportion becoming delinquent, at least initially.” The Department of Education did not respond with clarification.

Delinquency means you are late on a payment. At 90 days late, servicers notify credit reporting agencies. At 270 days late, the loan is in default and collections efforts begin, leading to consequences such as wage garnishment and seizure of tax refunds.

What to do if you can’t meet loan payments

“This very moment is when they should be looking at what their options are,” says Mayotte. “If they think they’ll need an income-driven plan, now is the time to get the paperwork in.”

If you think you may have difficulty repaying your debt, your best first option is to enroll in an income-driven repayment plan, which could help keep your payments manageable by setting the amount you pay at a portion of your income. It could even be zero if you’re unemployed or underemployed (earning under 150% of the poverty line).

Your next best option is an unemployment deferment if you’re out of work. It allows you to postpone repayment of federal student loans for up to 36 months if you’re receiving unemployment benefits or working part time while looking for full-time work. The catch is that, unlike the current payment pause, interest may accrue and be added (capitalized) on top of your total loan when you resume payments.

What to ask your servicer

You don’t have to wait to enroll in an income-driven repayment plan or an unemployment deferment, but your application won’t officially be processed until January, Buchanan says. What you can do now is talk to your servicer, gather your documents and get the ball rolling.

Buchanan advises borrowers to contact servicers (or use their websites) now and submit everything needed to change repayment plans or pause payments. You should receive confirmation via email or in your servicer portal that your enrollment is moving forward.

But it’s always a best practice to get anything you discuss over the phone in writing. Keep records of who you spoke with and the date.

When you call your servicer, ask about enrolling in an income-driven plan. There are four plans, but one that’s available to all federal direct loan borrowers is Revised Pay As You Earn, or REPAYE. It sets payments at 10% of your discretionary income and extends repayment to 20 or 25 years.

Parent PLUS borrowers should ask about income-contingent repayment, which caps payments at 20% of your discretionary income and extends repayment to 25 years.

Anna Helhoski is a writer at NerdWallet. Email: anna@nerdwallet.com. Twitter: @AnnaHelhoski.

The article Federal Borrowers Get to Skip Another Student Loan Payment originally appeared on NerdWallet.

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How to Handle College Loan Debt as an Unemployed Recent Grad

Posted on by Anna Helhoski

Entry-level jobs are scarce for recent college graduates, which leaves the Class of 2020 in a precarious position as their student loan debt comes due.

Taylor Cabrera has been job-hunting for months since graduating from the University of Mississippi last spring with dual bachelor’s degrees in biology and physics, and has moved in with family in Miami. Her only solid job lead so far was a two-week marketing stint that didn’t pan out, though she says she’s feeling good after a recent interview for an entry-level mortgage position.

Despite her challenges, Cabrera says she knows she’s fortunate when it comes to her student loans. Earning hefty scholarships meant she took on $14,000 in debt, about half of what the average undergraduate carries, according to the Institute for College Access and Success.

“It’s pretty good compared to what everybody else has, but it still hurts my soul,” Cabrera says.

Student loan payments typically begin six months after graduation. But those with federal loans like Cabrera have some respite: There’s an automatic, no-interest payment pause, known as forbearance, in place for all borrowers with federal student loans through December.

Private loan borrowers didn’t get the same break. But all borrowers have options to make payments more manageable, whatever their employment status or type of debt they carry.

Employment barriers for recent grads

Leaving college without a job offer isn’t uncommon, especially during economic downturns. But the class of 2020 faces unique challenges.

The effects of COVID-19 have hit every industry, says Nicole Smith, research professor and chief economist at Georgetown University’s Center on Education and the Workforce. She adds that outside of telecommunications and tech, very few sectors are hiring right now.

“If you’re looking for a corona-proof job, it doesn’t exist,” Smith says.

Positions with titles that include “entry level” or “new grad” have dropped 68% compared with the same time last year, according to a June 2020 report by Glassdoor. Graduates with little or no experience are competing with millions of unemployed Americans.

On top of that, new entrants to the workforce can’t access the safety net of unemployment benefits, even as the prospect of student loan payments looms.

Two options for federal student loan borrowers

Until employers start hiring again, recent graduates have some options to ease their debt burden.

The federal payment pause gives them time to breathe since loan bills won’t be due until January, barring a possible extension. To manage payments when they restart, those without jobs can choose an income-driven repayment plan or an unemployment deferment.

An income-driven repayment plan is your best long-term option. It caps payments at a portion of your income — 10% for example — and extends the repayment term. If you’re unemployed — or underemployed — your payment could be zero. You must contact your student loan servicer to enroll.

If you need short-term relief, unemployment deferment allows you to postpone repayment for up to 36 months in six-month increments. It’s less desirable than income-driven repayment because interest builds and is added to the total debt when repayment begins. To qualify for an unemployment deferment, you’ll need to apply with your servicer and prove you’re either receiving unemployment benefits or, in the case of recent graduates, seeking full-time work.

Cabrera says she plans to look into income-driven repayment.

Have a plan before payments start

If you’re planning to change your loan payments, do it as soon as possible to keep payments manageable, says Scott Buchanan, executive director of Student Loan Servicing Alliance, a nonprofit trade association representing student loan servicers.

Even if you’ve yet to begin payments, you can talk to your servicer to start off in an income-driven repayment plan when payments begin in January, Buchanan says.

Private student loan borrowers have fewer options to alter or pause payments compared with federal student loan borrowers. You must contact your lender to find out if you qualify for a temporary reduction in the payment amount or to request forbearance.

Several private lenders are offering disaster or emergency forbearance for up to 90 days in addition to any existing options. Unlike the current automatic pause on federal loans, any private loan forbearance still accrues interest.

This article was written by NerdWallet and was originally published by The Associated Press. 

Anna Helhoski is a writer at NerdWallet. Email: anna@nerdwallet.com. Twitter: @AnnaHelhoski.

The article How to Handle College Loan Debt as an Unemployed Recent Grad originally appeared on NerdWallet.

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