Use stimulus to pay down plastic vs. student loans
Federal forgiveness may help alleviate college debt so you might want to wait
Many families could be looking at more money than they’ve ever seen at once when you add stimulus cash of up to $1,400 a person on top of a healthy income tax refund.
So — if you haven’t already spent it — what’s a solid plan to save it?
“If someone has credit card debt, I think the best use of any money would be to pay it off,” said George Papadopoulos, a certified public accountant and financial adviser in Novi, Mich.
The average rate that consumers are paying on credit card debt is
16.15 percent, according to Creditcards.com.
The rate on your cards could be much higher, if you have bad credit or built up debt on a credit card issued by some retailers. The average rate for those with bad credit is 25.3 percent, according to Creditcards.com.
“Credit card debt must go,” Papadopoulos said. “The sooner the better. It is impossible to build wealth when you carry credit card debt paying egregious interest rates on it.”
Families with credit card debt had around $6,300 in such debt on average, according to the 2019 Federal Reserve Survey of Consumer Finances. More than 45 percent of families reported a credit card balance after their last payment.
A stimulus payout — and a tax refund — could make an enormous difference in dealing with one’s bills.
A family of four, for example, could be looking at up to $5,600 in stimulus cash as part of the latest round of payments.
Once you pay off credit card debt, many financial advisers suggest that consumers of all ages take a hard look at emergency cash on hand. Having enough money set aside can shore up your mental well being — and cover many bills — if you lose a job or face a stock market meltdown.
“It allows people to let the long term investment portfolio do its thing — which is fluctuate, sometimes wildly — without having to sell at inopportune times to survive,” Papadopoulos said.
“It is very important to have a fat emergency fund account,” he said.
In general, experts say people should consider having three months to six months in savings to cover their everyday bills in case of a job loss or other emergency.
The temptation to spend instead of save in 2021 is clearly out there.
The latest round of stimulus cash has many turning on the “spending facet,” according to Anand Talwar, deposits and consumer strategy executive for Ally Bank.
By contrast, the first round of stimulus checks in the spring of 2020 prompted one of the most extraordinary periods of personal savings in recent history.
“People were certainly hunkering down,” Talwar said.
Now, he noted that data from Ally’s customers indicated a 43 percent spending surge among customers who received the stimulus checks in March. Much of the big spending involved airline travel and clothing. People were twice as likely to spend that stimulus money as a tax refund, based on Ally’s data.
As more people are vaccinated and see a light at the end of the tunnel, more are willing to book a trip or spend on work clothes, as some expect to head back into the office soon. Increasingly, Talwar said, many consumers are more confident about the future than they were a year ago when the pandemic began.
The third round of stimulus by its nature was more likely to be spent, Talwar said, because it was a bit more targeted by income thresholds than the first two programs to reach those who really needed the money.
The full $1,400 goes to single people earning up to $75,000. But it phases out quickly after that and is completely phased out for those earning more than $80,000.
A full payment of $2,800 goes to a married couple filing a joint federal income tax return earning up to $150,000. The phaseout begins after that and ends at $160,000. Families with children also received more money in the third program.
Right now, Talwar said, people aren’t giving up long term savings goals. He’s hopeful that many people maintain healthy savings habits and avoid “revenge spending” — where people make up for lost time in 2020 by spending lavishly or carelessly, take your pick, in 2021.
Diane Swonk, chief economist for Grant Thornton, noted in an April report that the saving rate hit 27.6 percent — more than $6 trillion — which is below the peak of 33.7 percent reached in April 2020.
“Most of the stimulus checks were saved or used to pay off bills that accumulated late last year,” she wrote.
“If you’re mired in debt, stimulus money can really feel like a lifeline,” said Melissa Joy, president of Pearl Planning, a wealth adviser in Dexter.
“First, make sure that you have some cash on hand for when things go wrong,” she said.
But take time to understand what debt makes sense to pay down now — and what doesn’t. Should you try to pay down student loans with stimulus cash?
Joy said you also want to evaluate whether any of your student loan debt can be forgiven — think public service loan forgiveness — and consider what loans might never be forgiven, including private student loans.
It’s important to remember that we could see some broad student loan forgiveness later this year, said Mark Kantrowitz, author of “How to Appeal for More College Financial Aid.”
President Joe Biden has said that he supports $10,000 in student loan forgiveness.
But others — including U.S. Sen. Elizabeth Warren, D-massachusetts — are calling for $50,000 in student loan forgiveness.
“Given that the amount of forgiveness and eligibility criteria are unknown at this point in time, borrowers should not take any actions that might make them ineligible for loan forgiveness, such as paying off their debt or refinancing federal loans into private student loans,” Kantrowitz said.