How’s everyone doing? Are we tired of the word “unprecedented” being used at the beginning and throughout everything we’re reading?

unprecendented
There’s always a chart

How about this $2.2 Trillion recent CARES Act? Do you know what that means for you and what financial moves to consider right now?

In this article, I’d like to chat only about student loans and emergency savings right now as it relates to the current crisis. The remainder of the article is some info on what you need to know and some possible steps to take towards coming out of this in as best financial shape as you can.

One expert’s simple advice

For those of you who may know already, my go-to financial resource is Ramit Sethi from the brand I Will Teach You To Be Rich. He’s been a financial expert for over 15 years and has written a fantastic book along with an insane amount of content relating to the world of finance. What is he saying about all of this?

Your number one priority right now should be to build up at least 1-year of emergency savings

Ramit Sethi, I will teach you to be rich

This is coming from a guy who religiously preaches about never stopping your investments during a recession and the like. That gives you a sense that this situation is in fact a little bit different.

So, if you are looking for a simple answer to what to do with your money, it is to save everything you can at all costs. This means suspending or stopping all luxuries and non-essential spending until you have at least 6-12 months of emergency savings.

This would also mean temporarily pausing (but not selling) your investment contributions despite the benefits of not doing it. And this may also mean postponing your debt payoff if and only if you can get your lenders to pause interests. Some Credit Card Companies may just let you do that.

Again, this is not permanent. It’s a temporary plan to pool as much cash as you can in case the storm continues.

Some actions to consider

  1. Cut the fat, buckle down, and save that cash up.
  2. Call your credit card company, mortgage company, etc. and ask them to suspend all payments or interest. If they say no, keep pushing for something beneficial. If they are good companies, they’ll value your long term business.

Info on the recent federal student loan relief

Yes, we are in crisis mode but all is not lost. For those who do have student loans left to pay, there has been some relief from the government.

As you know, on March 27, 2020, the president signed the CARES Act, which provided broad relief in response to the COVID-19 for federal student loan borrowers whose loans are owned by the U.S. Department of Education (ED).

While the provisions of the CARES Act that affect federal student loans are temporary, you will get relief until Sept. 30, 2020, for the time being if you have Federal Loans which includes:

  • William D. Ford Federal Direct Loan (Direct Loan) Program,
  • Federal Family Education Loan (FFEL) Program
  • Federal Perkins Loan (Perkins Loan) Program loans.

The interest rate and status changes apply only to your federally owned. If you have other federal student loans that are not owned by ED and/or have private loans, you’ll need to contact the servicers of those loans to discuss potential relief options.

Here’s what that entails and some actions you might take:

  • The interest rate on the loans drops to 0% for this period
    • Interest rate and status changes apply only to federal loans
      • ACTION: Ensure which of your loans qualify – online or by phone
    • Given the 0% interest rate, any payments you make during this period will be applied to paying down the principal amount of your loans 
  • Automatic Billpay Forbearance
    • Auto debit/pay should have been automatically disabled and you are not required to make monthly payments on your loans during this period
    • ACTION: Take a look at your account to see how this is working and if it is working correctly. Find out what that would mean if you do want to keep making payments or update this auto-pay option
  • Payments you would have been required to make between March 13, 2020, and Sept. 30, 2020, will count toward loan forgiveness (i.e. PSLF) if you’re in it

A few other financial options?

Maybe you don’t want to save 6 months of emergency expenses or you already have that. Or maybe you want to keep saving modestly while paying off your debt.

The three options that appear to be the best are outlined below. The one you choose will depend on your specific situation.

  1. Hold off on paying your loans and possibly your other debt
    • Double-check the credit card payment pauses first. Did this work? Make sure you know before deciding
    • Save all money you’re paying on debt like your life depends on it and only pay the minimum payments you have to make
  2. Keep paying down your loans if you feel comfortable with your emergency savings
    • Manually pay your loans in the same amount you’ve been auto-paying
      • You already have been spending this money every month, so you won’t miss it
      • Depending on what your loan balances are, 6-months of principal-only payments will take a significant chunk out of that total and get you closer to paying those things off
  3. Take the money you’re using to pay towards your loans and in this order:
    • Pay off any other debt (i.e. credit cards, car, etc.). Your credit card interest rate is likely much higher than your student loans
    • Build up your emergency fund to
    • Invest it after your 6-12 month emergency fund is built
  4. (Optional) Follow step 1 and then refinance your loans after the crisis
    • Loan rates are tied to 10-yr Treasury Note, so rates for Student Loans could soon drop significantly to all-time lows
    • This may require you to go from a federal loan to a private-market loan
      • Pro: lower loan interest rate = savings in the long-term
      • Cons: you give up repayment flexibility and loan forgiveness plans
    • Note – If your loans are nearly paid off, this doesn’t make much sense since the fees you’d pay to refinance would likely be more than the money you save in interest. 

Conclusion

Yeah, it sucks right now and yeah, it could definitely get worse. If you are looking for the simplest solution with your finances right now, it seems that you already know the answer. Save the hell out of your money and don’t be reckless.

Hard to say what happens during or after this. Beyond saving, there are simple ways to take advantage of the student loan relief fund and the stimulus check you might be getting. If you are interested in chatting or seeing more numbers, I’d be happy to brainstorm with you.


Kudos to Ben Liptak for the inspiration.