How to accelerate your debt snowball during COVID-19

Use your federal student loan monthly payment amount to knock out smaller debt while payments are deferred.

If you have federal student loans, you do not have to make payments until this fall. Payments have been automatically suspended effective March 13 (retroactively) through September 30, 2020. There’s also 0% interest through that time. 

The temporary suspension of payments has likely provided much needed relief for those who’ve had a reduction in income, or a total loss of income due to COVID-19 by infusing extra cash into their budgets. The hope is it will help them cover the basics like housing, food, and transportation.  The loans are not forgiven, and you still have a responsibility to pay the balance. This is an important point to keep in mind, as it matters for the long-term economic health of our country. It also matters for your mindset.

But not everyone is in crisis, and for those that aren't the question of whether or not to take advantage of this payment suspension does not have as clear of an answer.

In general, if my clients meet the following criteria, I have been strongly encouraging them to continue making payments on their student loans:

• They can easily cover their 4-walls (housing, food, transportation, essential clothing) 

• Insurance premiums are easily covered so policies don’t lapse

• They are debt free other than their student loans (and mortgage)

• They have at least $1,000 in a starter emergency fund (if not a little more)

There’s a very good reason for offering this advice. Pausing payments just because you can, without having a plan for those dollars, will likely lead you to spending in areas you wouldn’t typically spend in, or overspending in general. 

The greatest danger, however, in pausing payments when you don’t need to, is not being prepared to start making those payments again come October 1st. 

It’s amazing how quickly we can adapt to things, and if you’ve just infused your budget with an extra $400 a month (that’s about the average amount most people pay per month on their student loans) by not making your student loan payments just because you can, you’ll quickly get used to having that extra cash on hand for whatever you feel like. And come October, when payments are due again, you’ll be out of the habit of putting those dollars towards debt, and it will be hard to stop spending them on whatever it was you used them for between now and September 30th.

However, I do think that there is one scenario where choosing to accept the relief offered here even if you could afford to make the monthly payments might make sense for some people. 

If you’re looking to accelerate your get-out-of-debt plan, and you use the debt snowball method, this may be a chance for you to knock out some of your smaller debt quicker than would otherwise be possible.  That ultimately leads to tackling your larger debts faster, and becoming debt free sooner! You should meet these criteria as well before considering this plan:

• Be able to cover your 4-walls

• Be able to cover insurance premiums

• Have at least $1,000 set aside in an emergency fund

Here’s the deal: let’s say you have a handful of debts that look like this (see chart below), and your monthly student loan payment is $400 (remember, this is about the national average).

Assume you’ve already paid off one smaller debt so instead of making the minimum $25 payment on Credit Card 1, you’re making a snowball payment of $50 ($25 from the paid off card plus the $25 minimum for the current card). On that plan, you’ll have Credit Card 1 paid off by October (assuming you don’t have extra money to throw at it).

However, by adding $400 from student loans to your snowball, you just paid off Credit Card 1 in one shot. Bam! We added the $400 student loan payment to the $50 you were already using towards this debt to get a new snowball payment of $450.

With May’s payment you knocked out another debt; you have an extra $125 ($450 to spend on debt - $325 balance on Credit Card 1 = $125 left over) to throw at Credit Card 2 in May. You are now on your way to eliminating Credit Card 2 by July.

There’s more – with the usual snowball plan, Credit Card 3 would be paid off somewhere around August 2022 (this is basic math here – we're not taking interest into consideration, which obviously changes things a little bit, but not enough to make a huge difference). With the new snowball payment the balance for Credit Card 3 would be $145 at the end of September 2020. In October you go back to the standard snowball payments of $125 (student loan payments are due again in Oct), so this card is wiped out by November 2020.

This works BECAUSE interest rates are at 0% during this time so your absence of payment isn't penalizing you. It accelerates your debt snowball, allowing you to throw more money at your larger debts sooner and it keeps those dollars that would have gone to federal student loans actively working for you. It also maintains your habit of directing dollars towards debt and not getting sidetracked into using those dollars for something unrelated to debt. AND it gives you some huge psychological wins!