April 09, 2020
I know some of you have already lost your jobs as the economy reels from the impact of the coronavirus crisis. And many more of you are worried about a job loss or sharply reduced hours.
These are scary times indeed. But, as you have heard me say so many times, the only productive, healthy and helpful way to deal with fear is to summon the courage to take action.
And some good news is that unlike the financial crisis more than a decade ago, if you are ready to ask for help, you may find your lenders and your credit card issuers are willing to work with you to reduce or suspend your payments for a few months (and perhaps longer, depending on how the economic impact of the crisis continues to unfold).
In some instances, the federal government has stepped in and told lenders to automatically reduce payments. That’s so good to hear, but please don’t just sit back and assume everything will automatically be adjusted. It is so very important you take control and contact all your loan servicers, all your credit card issuers, and even your utility providers. In some cases, you will want to verify that you are in fact going to get an adjustment for the next few months if you qualify under various federal programs (more on this in a second), and in other instances —such as credit card bills—you may find there is help available, but only if you ask.
Here’s what you need to know.
Federal student loan payments. The big stimulus legislation passed by Congress includes a provision that reduces interest payments to 0% through September 30, 2020 and also allows you to suspend your entire monthly payments through the end of September, without penalty. This applies only to federal student loans, not private loans.
If you have lost your job, this is obviously great news. If you are still working and can continue to make principal payments, it may still make sense to suspend your payments. Right now, it is so crucial to build up emergency savings. If you don’t have eight months of living costs saved up, I would rather you redirect your student loan payments into your emergency savings fund.
Mortgage payments. If your mortgage is “owned” by a federal agency –and the majority are— you may be able to reduce or suspend your payments for up to 12 months if you have lost a job, have reduced wages, or are sick. Many banks are also stepping up with their own relief plans. And in some states —California is one —lenders are being required to offer relief. The bottom line is that you should contact your mortgage service ASAP and ask what relief you are eligible for. To be clear, you still owe the interest and principal—you’re just suspending payment for now.
Loan servicers are scrambling right now to offer help, so it may not yet be clear what sorts of programs they will offer once you start repaying. But it is smart to see if they have decided on any repayment options: Increased monthly payments when you are back on your feet? Extending the loan term (adding more months to it to make up for the months you didn’t pay), or some sort of loan modification? That’s information that can help you decide how to proceed over the coming months.
Car loan payments. If you can verify an economic hardship, your car loan servicer may be willing to suspend your payments for a few months. There is no federal program for this, it’s a case-by-case situation with each car loan servicer. Just be aware, that during the period you are not making payments, the interest on the loan continues to be charged, and will be added to the balance of your loan.
Credit card payments. In a nice change from what happened during the financial crisis, some credit card issuers are stepping up and trying to help households who have lost income due to the coronavirus crisis. But it is crucial to call and ask what help is available. If you have a balance you can’t afford to pay off, ask if the interest rate can be cut to 0% for the next few months. Some issuers are offering this. You may also be able to have the payments deferred—interest free—for a few months, or have your minimum payment amount reduced. The key is to ask what help is available.
You should also check in with your utility providers about flexible payment programs during the crisis. I can’t stress this enough: don’t be shy about asking for help. Don’t think there is no point. So far, this is looking a bit different from the financial crisis that began in 2008. Many financial institutions, businesses and the government, seem to be focused on helping households quickly with ways to reduce their monthly expenses. But in many instances, that help is only available if you stand tall and ask for it.
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.