How to prioritize debt payments in the pandemic

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 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.