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5 Tips to Manage Your Debt in a Recession

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Figuring out how to pay down debt can feel challenging just on its own. Add in a global recession like the one we’re currently in, and you may have a lot of questions about how to tackle loan balances, especially if your financial situation turned along with the economy.

Should you continue to make payments on debts or save? Do certain loans take priority over others? Will lenders be flexible about changing their terms if you’ve lost a job?

For most people, continuing to chip away at debt, even during an economic slump, can be a good idea.

Here’s how you can tackle your debt, with five strategies for paying off outstanding balances while being mindful of how the recession may have impacted other areas of your financial plan.  

1. Take stock of what you owe

The first step to getting a handle on your outstanding balances is to revisit the types of debt you have, the amounts, and their interest rates. Doing so could help you see the full picture of what you owe on various accounts and if there’s been a change in your financial situation, prioritize which debts may be worth tackling first. 

Some of your debt may have been impacted by Covid-19 relief programs or assistance. A few examples of accounts that could now have different terms include: 

Federal student loans

Under the CARES Act, the interest rate on certain federal student loans owned by the Department of Education has been temporarily set to 0%, and payments have automatically been placed in administrative forbearance (or put simply, suspended) until September 30, 2020.

This rule applies to Direct Loans, FFEL Program loans, Federal Perkins Loans and defaulted HEAL loans. You can call your loan servicer or login to your account on StudentAid.gov/login to find out if your loan is eligible. 

If you are able to continue making payments, doing so could help you repay your loan balance more quickly because the payment will be applied entirely to your principal, once all the interest accrued before March 13, 2020 is paid off.

Note that you'll need to contact your lender and opt-out of forbearance to continue auto-payments or make manual payments during this period.

Mortgage payments

If you lost your income due to Covid-19, contact your mortgage lender to see if you're eligible for any temporary relief they may be offering.

Federally-backed mortgages, like those guaranteed by Fannie Mae or Freddie Mac, are required to provide forbearance, which allows borrowers to pause or reduce mortgage payments for a certain amount of time.

The good news is that other lenders may also be willing to adjust your mortgage payments, too. Call your loan servicer to find out what your options are. You'll also need to work out a repayment plan with your lender once you recover financially to make up for missed or reduced installments. 

Unsecured debt and other loans

While other lenders have not been ordered to provide assistance, some may be sympathetic to your current situation. Check in with your provider to see what Covid-19-specific relief options they might be offering.

Keep in mind, if you can continue making these payments, it likely makes sense to do so. Forbearance or temporary payment assistance doesn't mean your loans will be forgiven; your payments are just temporarily put on hold or reduced during tough times or financial hardship.  

2. Pay your most expensive debt

Once you have a clear picture of your debt situation, you can decide how you’ll want to pay it off. 

One strategy that can help you effectively manage outstanding debt is to concentrate on repaying accounts with the highest interest rate, first.

Knocking out high-interest rate debt cuts down on the amount of interest you pay over time, which could mean paying off your balances sooner.

For example, if you’re working on paying off two debts where one has an interest rate of 18% and the second has an interest rate of 12%, you’d start by paying more toward the debt tied to the 18% interest rate. You’d make just the minimum payment on the other balance in the meantime.

Once the account with the highest interest is paid off, move to the next most expensive debt, and so on.

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3. Look for lower interest rates and consolidate

Borrowers with high-interest debt may be able to consolidate their balances into one lower-interest alternative. Not only can that save money in interest fees every month, but it’s typically easier to pay one bill with a single due date, than managing several due dates a month.

Personal loans

One way to consolidate high-interest credit card bills is by taking out a personal loan. If you have a good credit score, you may find that personal loans can offer lower interest rates than those you’re paying, for example, on credit card debt.

These loans may also offer repayment terms, usually from 12 to 60 months, with fixed payments, which means you’ll know exactly how much you’ll pay each month to reduce your principal balance. 

With a personal loan, you typically receive the funds all at once in a lump sum, so you could use it to pay multiple types of existing debts.

Before taking out a loan, it’s worth crunching some numbers: consider the loan’s interest rate compared to your current debt as well as the repayment term – if a personal loan’s repayment term is longer than you think you’d need to pay off the debt, the loan may not be worth it, as you could end up shelling out more in interest over time.  

Balance transfers

A balance transfer can also be a good option for anyone paying hefty credit card interest.

Balance transfer credit cards allow you to move debt from credit cards with high interest to a new one with 0% interest for a set amount of time. But, just like with personal loans, your credit score will need to be solid to get approved. 

It’s a good idea to compare balance transfer card offers from several lenders to determine which is the right option for you. The longer the 0% period, the more time you’ll have to pay down your debt before interest kicks in.

Also note that some cards may have a balance transfer fee, which is typically 3% to 5% of the transfer amount. In some cases, this fee may be waived if you make the transfer within a set time frame, so read through the terms carefully before signing up.

While personal loans and balance transfer cards can provide alternatives to paying multiple high-interest debts, creditors may need to initiate a hard credit pull to determine your eligibility, which may temporarily decrease your credit score five to 10 points.

That said, an occasional drop of a few points isn’t likely to ruin your score.

4. Continue building up your savings

While it may be tempting to set aside your savings goals and pay down debt instead, this may not be the best idea, especially when the economy and job market are uncertain.

If your financial situation suddenly changes with a job loss or other hardship, having some cash around to cover basic costs like rent and utilities can ease a lot of stress.

Experts recommend socking away at least three to six months of living expenses into an emergency fund; if yours could use a little extra padding, consider putting some money in it and some toward paying off debt.  

Saving for retirement is also an important goal, even during difficult times. If you’re able to, continuing your 401(k) contributions is usually a good move, especially if your employer offers a match program.

Over time, the power of compounding in these investment accounts can help your money grow.

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5. Prioritize spending needs

Social distancing rules and closed businesses may have resulted in a temporary pause on some discretionary spending, like gym memberships and happy hours, but these experiences may be available again soon.

As you’re thinking about your budget and updated spending habits, it’s worth doing an audit of your expenses to see if there’s any extra cash you could be putting toward debt.

Didn’t miss daily coffee runs? You could consider cutting them out permanently. 

Next, think about what other trade-offs could shift more money toward savings and debt. Perhaps it's swapping meal-delivery kits for grocery shopping and home cooking, or settling on just one steaming TV service instead of a handful.

Every dollar you save by paring down non-essential items could be used to pay down your debts even faster. 

Tackling debt in a down market

Paying off debt during an economic downturn is smart, but can feel tricky, due to changing job and financial situations.

Locking down a few key habits can help you manage your debts with more confidence and boost financial security. 

When you work on knocking out debts during a recession, know that you’re helping to get your own finances in a good place for when the economy is in better shape.

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.