Do I Pay My Student Loans Or Save For An Emergency During COVID-19?

Dear Paco,

I feel like I’m at the end of my rope with my private student loans. I’ve used up the short-term forbearance my loan servicer offered. I’m barely able to meet my minimum monthly payments and I feel less and less motivated to pay them, especially when I feel so anxious about the immediate future. I feel compelled to create an emergency fund in case I get laid off (which I swear is going to happen any day now). But the advice is usually to stay on top of your debt and pay as much as you can every month. What's the balance I have to strive for during COVID-19 between aggressively paying off debt vs aggressively building a rainy day fund?

What options do I have? Should I refinance my loans? What does that mean exactly? How easy or hard is it to defer my student debt, especially if I'm still getting a paycheck? Will it be easy to pause my payments if my worst fear comes true and I do lose my job? Is there some other option? Is there a secret way to make this burden just disappear?

I'm also struggling emotionally with a mix of guilt and anger. Maybe the government will miraculously cancel student debt? How do I balance the reality that I owe this money with the fear that the pandemic has given me? I feel like I have to pour every dollar I’m not spending on urgent living expenses to an emergency fund, because this year has shown that at any moment life can come crashing down.

Dear At the End of Your Rope,

Losing my job was one of the best things that has ever happened to me. When I lost my job, it gave me time to pause and reflect. And during that time, I started to ask myself, what were the things I was tolerating in my life as the status quo that I no longer wanted to tolerate? Not earning enough money was one of those things, and my almost non-existent emergency fund reflected that. After I lost my job, I decided to start my own business because I was tired of someone else deciding how much money I was making.

I don’t think everyone who loses their job will start a business; that’s not the point I’m trying to make here. My point is that even though there are plenty of things outside of our control, like losing a job, there are things we can control that have a real impact on our experience in life. Here are three things in particular:

First, we control the story we tell ourselves about things that happen to us. Losing your job is scary, no doubt, but it can also be a really exciting start to something better, or a wake-up call for what needs to change. 

Second, we can control the stories we tell ourselves about the decisions we make. You can look at saving extra money in your emergency fund as taking away money you could be spending on something else. Or you can look at that same action as an act of self-care and sticking-it-to-the-man-anti-consumerism. 

The third thing we can control is how we assign meaning to events, experiences, and decisions we make. Your student loans and this pandemic could be a meaningful turning point in how you deal with your financial life, just like how losing my job was for me. People assign meaning to things, and that’s what drives them to want to change the world. We’re seeing this happen every day as this crisis wakes people up.

This is not some esoteric exercise. The way you think about your money and your debt impacts how you really feel in life. And how you feel is what will drive you to find a different way to operate. Feeling stuck can keep you scared of anything other than the status quo.

Once you realize that you’re in charge of how you feel, no matter how scary and crazy things outside of you are, you can work to stop feeling like your debt is a burden and figure out what your strategy will be to deal with it today and in the future so you never have to feel this way again. 

I know things are uncertain right now, but the truth is, life is always uncertain. Despite that, one thing we can be certain about is the nature of our economic system. We’ll have times of boom and bust, financial shocks and periods of recovery. Yes, we’re entrenched in chaos right now, but this too shall pass.

So what should you do about your private student loans? First, I wouldn’t count on the government forgiving student loans as a strategy right now. I’m not saying it’s not possible, just that in the short-term, it’s likely not probable — and it’s completely out of our control. Let’s shift the focus on what we can control.

If you can’t afford your loans right now because your hours or salary have been reduced, your best bet is to reach out to your lender to find out what your options are. You might be able to ask for a deferment if you’re experiencing a hardship, like job loss. Each private lender will have their own programs to help people who are facing economic hardship due to COVID-19. There’s a lot of anecdotal advice that says you need to mention your hardship is “due to COVID-19” in order to qualify for the new assistance programs lenders have created to help borrowers during this time. In the past, I’ve heard reports that requesting deferment can be difficult unless you really are experiencing a hardship. That might be a little different in today’s climate.

Unfortunately, private loans are not subject to the same regulations that federal loans are, including the loan suspension that was provided by the CARES Act. Every lender is different and has their own loan contracts, so speaking directly to your lender is the only way to truly know what your options are right now.

Refinancing your private student loans could be another path. Let’s dig into that. First, what is refinancing? It’s when you take out a new loan and use the new loan money to pay back your original loan. The original loan is paid off and you’re left with the new loan. The reason people refinance is because the new loan has better terms. The better terms will allow them to either lower their monthly payments or lower the total amount they’ll pay in interest. 

Of course, there are caveats with refinancing. If you lower your monthly payment, you might be extending how long it takes you to pay off your loan and you might end up paying more interest in the long run. That’s the trade-off, though — breathing room now, but you pay more in the end. And the higher your credit score is, the higher your chances are of getting approved for a favorable loan. If you have a low credit score, you might need to focus on building that up before refinancing.

You can explore your refinancing options by using a broker and doing a soft credit check to see what you might qualify for. A broker will shop around for more than one lender so you can see different offers that you will most likely qualify for. Credible is a broker and online marketplace that will shop around and show you multiple lenders. Of course, you can also shop directly with lenders. Most will allow you to do a soft credit check to see what you will likely get approved for. Once you see your options, you can decide which lender is the best fit for you.

You also asked about finding the balance between the two priorities of paying down debt and putting money into an emergency fund. I wouldn’t put any extra money towards debt until you have at least a few months of emergency savings on hand. Having an emergency fund can keep you from going further into debt. Once you have a few months saved, you can split your priorities. For example, if you have an extra $500 a month, you can put $250 into savings and $250 towards debt. Your split doesn’t have to be 50/50 either; it can be much more skewed towards savings, which is what a lot of financial experts are advising in the short term — at least until we see how this current economic climate will turn out.

Lastly, if you aren’t seeing a therapist to help you deal with your feelings of uncertainty and anxiety, I would strongly consider it. We are all experiencing financial trauma that could have a harmful impact for a long time. There’s no better time to work through it than now. There are affordable counseling options out there, like Open Path Collective. You can also check out your local colleges to see if their counseling graduate program offers discounted sessions.

Until we have robust government programs that address the real roots of issues like rising tuition costs, predatory lending, and inequality, we have to find ways to navigate through these financial problems ourselves. I hope talking openly about them can help change the tide.

Your finance friend,

Paco