You Ask. Bev Answers: Should I Pay Down Debt or Save?
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In a time of great uncertainty, a voice of knowledge and reassurance can make all the difference. Beverly Anderson, President of Global Consumer Solutions at Equifax, answers your questions based on her years of experience in the consumer finance industry. You can post a question for Bev on Equifax’s Facebook page. Bev regrets that she cannot answer every question individually.
Question: My student loans are on hold during the Coronavirus/Covid-19 pandemic. Should I continue to pay down my debt or put the money toward savings?
Each individual’s financial life is different. So, it may not come as any surprise that the answer to your question will depend upon a myriad of details that you didn’t include in your email. But the general question — should you use extra cash on hand to pay down debt or build up your savings — is worth exploring.
I’ll get to the answer in a moment, but first and foremost, you have to be clear on one thing: whether your student loan debt has really been paused.
For most federally backed student loans, payments and interest have been automatically suspended through September 30, 2020. However, some student loans don’t qualify for this benefit, including those under the Federal Family Education Loan (FFEL) Program, private student loans that are owned by commercial lenders and some Perkins Loans that are held by the institution you attended. If you’re at all unsure about whether your debts qualify for automatic forbearance, check with your loan servicer before ceasing payments.
Once you’re sure that your student loans are on hold you can tackle the “pay down debt or save money” question.
Paying down debt vs. saving money
Generally speaking, if you haven’t already established some kind of emergency fund, it’s a good idea to prioritize building a savings account before putting extra cash toward your debt.
The Covid-19 pandemic has left many Americans wondering when the economy will get back on track and questioning future job security. An emergency fund — money set aside to cover unplanned expenses — can provide support in case your car battery dies, your water heater needs replacing or you lose your job. Having enough emergency savings is important during any time of uncertainty, but especially right now when you consider that close to 40 million Americans lost their jobs within a recent 10-week period.
How much should you save?
If you can, try to save six months’ worth of expenses in an emergency fund. I know this may feel unrealistic if you’re struggling financially. So, start small by saving one month’s worth of expenses, then another and another until you’ve reached your goal.
What’s the best way to save?
If you ask your employer to divert even a small amount of cash from each paycheck into a separate account, you’ll soon begin to see the savings add up. And if you don’t make it too easy to access that money, you’ll find that you won’t even think about the funds that are sitting in the account, growing slowly but surely.
But what about paying down my debt?
If you already have robust emergency savings, now may be a great time to pay down your student loan debt a little more quickly. Currently, interest payments on many of those obligations are paused, allowing you a unique opportunity to pay down the principal balance on the loan faster than you would otherwise be able to. That means you’ll also avoid paying interest on that principal, which will reduce your costs over the life of the loan.
Regardless of which action you choose to take, both building your savings and paying down debt are great steps to take during this forbearance period. The important thing is to take full advantage of these unique opportunities to bolster your finances.
Beverly Anderson is the President of Global Consumer Solutions at Equifax. She is responsible for the strategy, development, growth and profitability of direct and indirect businesses serving consumers with credit, identity and financial education products and services.
For more than three decades, Beverly has built businesses and delivered significant results in the financial services and payments industries. She drove consumer and small business strategies, product strategies, and enterprise growth and profitability strategies for First USA (now JPMorgan Chase), Fleet (now Bank of America) and American Express. Before joining Equifax, she was the Executive Vice President of Cards and Retail Services at Wells Fargo where she led consumer credit cards, co-branded cards, loyalty solutions, retail finance, digital payments and enablement capabilities. She has also held leadership roles managing auto loans, personal lines and loans, servicing, loan operations, collections and fraud operations. https://www.equifax.com/about-equifax/corporate-leadership/beverly-anderson/