Millions of people living in the U.S. have struggled financially during the COVID-19 pandemic. When lenders began offering options for forbearance, according to a Northwestern Mutual 2020 study, roughly 26% of U.S. adults took advantage of deferral plans, which included mortgages, rent, credit card bills, utilities, student loans, and auto loans. However, depending on when you opted to defer, your grace period may be ending soon.
When it comes to paying back your forbearance, whether you deferred on your mortgage, student loan, or credit card, you have varying options—some that may work better for you than others.
Here’s what you should know:
Both federally backed mortgage servicers and student loan lenders were required by the government to extend the forbearance period, until June 30 for mortgages and until Sept. 30 for student loans. When it comes to paying back your mortgage forbearance, there are a number of options. You can choose to follow a repayment plan, which adds a portion of your forbearance balance to your regular monthly mortgage payment until it’s paid off. If you can afford to pay a little bit extra, this is an efficient way of eliminating your extra mortgage debt.
Under the CARES Act, lenders cannot require you to repay your forbearance balance in one lump sum (reinstatement), but if at the time your forbearance ends you can afford it, then you have the option to pay it off entirely.
With a deferral or partial claim, you can defer your forbearance balance until you have paid off your mortgage, or your loan payments will be put into a junior lien, which is repayable when the owner refinances, sells, or terminates their mortgage.
Foreclosure is the worst possible scenario, so there are some who may end up selling their homes if they can’t make the payments. Of course, there are solutions if that isn’t an option for you. Try applying for a loan modification, which would lower your interest rate or balance, or extends your mortgage repayment plan so that your monthly payments are more affordable.
If you’re still unable to pay your student loans when forbearance ends, it’s possible to apply for deferment. During this time, interest on federally subsidized loans will not accrue, while any interest on unsubsidized loans will be added to your loan. However, if you can afford to pay monthly payments, but don’t (or can’t) want to pay one lump sum, the forbearance balance will be added to your loan balance, extending the amount owed. If you’re able to, paying on your student loan balance occasionally while it’s in forbearance will benefit your overall repayment plan in the long run.
Credit Card Debt
Although credit card forbearance may have been a lifeline during difficult times, it’s only a short-term solution. While your payments are paused, your interest still accrues, and if you still use your card, so has your balance. Knowing when your deferral ends is the first step toward staying on top of incoming debt—and deciding how you’re going to repay your credit debt is the next. There are a number of techniques that can be applied toward paying off credit card debt, but if after forbearance ends you’re under a mountain of debt, it might be time to look into a debt management plan. Credit counselors will work with you and your credit card lenders to consolidate your payments, reduce your interest rate, and pay off your loan in three to five years, all with one affordable monthly payment.
No matter what type of debt repayment you have on the horizon, you will find the right choice for you and your specific situation, ensuring heightened financial well-being.