When the pandemic hit in early spring, it seems like everyone was offering some sort of payment deferral program. Banks, student loan companies, credit cards, lenders — even utility providers rolled out plans that allowed consumers to temporarily suspend payments.
And for many Americans, it was a lifeline they grasped onto with both hands. About one in four Americans say they’ve taken advantage of some sort of payment deferral program because of the Covid-19 pandemic, according to the latest data released from Northwestern Mutual’s 2020 Planning & Progress Study. The online survey included over 2,700 U.S. adults and was fielded between June 26 to July 10, 2020.
Housing and credit card payment deferral programs were among the more common plans consumers opted into, the survey found. Still, while a good portion of Americans have taken advantage of these programs, about 74% of respondents say they haven’t enrolled in any kind of relief.
And more Americans may be forced out of these plans as the programs expire. Many utility companies and states are ending their shutoff protection programs, while mortgage deferral programs may also be expiring for some consumers. The federal government, however, has put in place payment protections for student loan borrowers and renters through the end of the year.
Navigating these programs can be challenging, but experts say that taking some simple steps and doing your homework can help you avoid pitfalls.
1. Understand that suspending a payment is not forgiveness
For those who are considering enrolling in, or still on, a payment plan, it’s important to understand the difference between deferral and forgiveness, says Elliot Pepper, a certified financial planner and director of taxes for Baltimore-based Northbrook Financial.
“While there might be a temporary relief on current cash flow needs, any payment not being made today will have to be made at some point in the future,” Pepper says.
The psychology behind the common saying “out of sight, out of mind” can have negative consequences for consumers, Pepper says. At times, it can lead to people forgetting to pay a loan or bill, even after they exit the deferral program. While it is certainly easy to stop paying, it can be mentally, emotionally and financially difficult to start making payments that were previously a part of your regular budget and cash flow but were temporarily deferred, he adds.
2. Evaluate all of the options
While it may be possible to enroll in a deferment program without being laid off or suffering from financial hardship, consumers should not defer their bills if they can afford to pay them, says Deborah Ellis, a California-based certified financial planner and vice president of financial planning for Cogent Independent Advisors.
“Deferred payments are best used in an emergency, because you will have to pay the money back at some point and probably sooner rather than later,” she says. “Gambling that you can take that money and use it for anything other than emergency subsistence is not your best financial choice. It is not free money.”
Whether you’re currently enrolled in a deferment plan or simply considering taking that step, look around at what other options you may have to tap into. Do you have ample emergency savings? Can you refinance your mortgage, for example, at a lower rate and reduce, rather than defer, your payments?
If you have secure employment (even if you’ve taken a pay cut or had your hours reduced) and a strong financial foundation (including an emergency savings and/or not a lot of debt), it may be best to stay away from taking a deferment, especially on mortgage payments, says Tara Unverzagt, founder of Calfornia-based South Bay Financial Partners.
One of Unverzagt’s clients had her pay cut, but her job was secure and she had money in the bank for emergencies. “I told her to keep paying her mortgage,” Unverzagt says.
3. Deferments can make sense in some cases
Yet while many Americans can and should seek other options when it comes to paying their bills, deferral programs are a good solution in some instances, especially for those who have lost their job and need to stretch their cash for as long as possible.
“Freeing up cash flow today and delaying that expense until the end of a loan is usually a good idea,” Daniel Granucci, a financial planner and president of Connecticut-based Iron Path Wealth Management.
Another one of Unverzagt’s clients, for example, lost their job right before the pandemic hit and that made their job search much more challenging. She recommended they sign up for forgiveness and/or deferment programs, so they could continue to pay for the everyday essentials.
Basically, if you’re having trouble paying for expenses such as housing and food, then having cash on hand for as long as possible is key, she says. You can use these programs to postpone expenses until you’re on surer financial footing.
“As long as interest is not accruing, it generally makes sense to keep that money in your pocket,” Granucci says.
4. Federal student loan deferrals may be a good place to start
If you’re considering deferring payments on multiple accounts, or trying to decide which payment to defer, consider starting with suspending payment on your student loans if you have a federally-backed loan. The so-called CARES Act temporarily allowed federal student loan borrowers to suspend payments, as well as dropped interest rates on federal loans to 0% These protections were set to expire September 30, but President Trump signed an executive order that extends the payment pause through January 2021. This only provides a payment suspension for federal loans owned by the Education Department and does not apply to private loans.
“For people with federal student loans, the student loan suspension is essentially an ‘interest-free’ loan from the government which allows you to prioritize cash flow in other ways,” says Jake Northrup, CFP and founder of Rhode Island-based Experience Your Wealth.
And if you’re pursuing student loan forgiveness — either tax-free public service loan forgiveness or taxable student loan forgiveness after 20 to 25 years of payments — Northrup says it’s a “no brainer” to continue deferring payments until you’re required to start paying again. This period of time frees up cash flow for other uses and still counts toward your forgiveness programs.
If you have experienced financial hardship or have a significant drop in income, you may want to consider re-certifying your income on your student loans so your monthly payments will be lower, or possibly at zero, when the payments restart again, Northrup says.
5. Have a plan before exiting deferment
You may not get to decide when your deferment plans ends, but even if you do have the option to extend a mortgage deferral time period, for example, it can be tempting to exit the program and get back to normal as soon as possible. Before you have to start paying back your loans or missed bills, analyze your current income and expenses — will you be able to keep up with the payments now? Have your circumstances really changed?
Generally, Steve Zakelj, a CFP with Colorado-based Flatirons Wealth Management, recommends clients do try to weigh the situation carefully. “We don’t want debt to build up which may encumber them in the future. If a client has lost their job, once they again feel secure in their employment, and have a few months’ reserve saved back up, they should go back to paying down the debt,” He says. But if they don’t have any savings and are still struggling to find work, Zakelj says there’s no harm in continue to stay in deferral.
If you can, take the time to carefully reevaluate your current financial situation, Ellis says. If the math isn’t working, ask yourself why you’re overextended. Are you living beyond your means? Or are you dealing with an emergency that you need additional time to cope with? What can you do today to reinvent your financial persona?
When you can understand and articulate what is important to you, what you value, what your priorities are take the time to write out a plan to achieve those goals. This typically provides a greater sense of satisfaction, confidence and certainty in your life, Ellis says.
Beyond just making the math work, Pepper says people need to look at their emotional and mental reaction to the situation. “If someone has gone through a traumatic experience — whether at work or home — the stress and anxiety that might accompany an increase in current expenses by exiting a payment deferral program could prove deeply detrimental,” he says.