COVID-19, Understanding the Federal Stimulus Package

COVID-19, Understanding the Federal Stimulus Package

The COVID-19 pandemic is not only a public health crisis, but a financial crisis.  Nearly 3.3 million Americans filed for unemployment last week, by far eclipsing the previous high of 665,000 in October 1982.  Major companies and small businesses are teetering on the edge bankruptcy.  And the stock market is like a roller coaster at an amusement park, with declines comparable to the Great Recession and the Great Depression.

On March 27, 2020, the federal government passed the single largest economic stimulus package in modern history to help ease the economic suffering.  It is called the Coronavirus Aid, Relief and Economic Security (CARES) Act.  It is an 880 page piece of complex legislation that I am sure has many Americans asking, “How specifically is this going to help me, and when?”

To help answer these questions I have reviewed much of these 880 pages, as well as more than 30 online articles.  I’d like to summarize what I have learned here.  There is a tremendous amount that this sweeping piece of legislation covers, some very relevant to the current crisis, some less so.  I obviously can’t review it all, but I’ll cover some of the most important and relevant parts of this stimulus package here.

I’ve only covered the portions of the CARES Act more pertinent to individuals and families, since this is a personal finance blog.  I have not gone into detail about how the CARES Act helps small businesses, large companies, hospitals, and state and local governments.  

Disclaimer: I don’t guarantee the accuracy of this information.  I have spent hours searching various sources to help summarize the details of this federal stimulus package for you.  However, before making financial decisions, you will need to gather your own information and consult appropriate financial professionals.

Overview

This is the single largest piece of economic legislation in the history of the United States.  It’s estimated total cost is $2 trillion dollars.  It roughly breaks down as follows (Source: npr.org):

• $300 billion in direct payments to individuals and families
• $260 billion to expand unemployment insurance
• $377 billion in aid to small businesses
• $500 billion in aid to larger distressed companies
• $153 billion in aid to hospitals and healthcare
• $340 billion in aid to state and local governments
• $44 billion for education related expenses and other costs
• $26 billion safety net for unforeseen expenses

Here are the highlights of how it might affect your personal finances.

Direct Payments to Individuals and Families

Right now people need money.  One of the primary goals of this legislation is to get some money into the hands of the American people as quickly as possible.  

This would be a one time payment to individuals and families.  This payment is not taxable and does not have to be paid back to the government.  

Eligibility will be based on your adjusted gross income (AGI) in 2019 if you have already filed your taxes.  If you have not yet filed for 2019, it would be based on your AGI on your 2018 tax return.  If that has not yet been filed, a 2019 Social Security Statement could also be used, although that may delay payment. The amounts are as follows:

• $1,200 to individual filers that made $75,000 or less, with a phase out at $99,000
• $1,200 if filing as head of household and made $112,500 or less, with a phase out at $136,500
• $2,400 if married filing jointly and made $150,000 or less, with a phase out at $198,000
• $500 for each child age 16 or under

The payment phases out at 5% per dollar of qualified income above the benchmark.  This means the payment is reduced by $50 for every $1000 you make above the benchmark.  For example if an individual taxpayer had an AGI of $85,000, this would be $10,000 above the $75,000 benchmark, resulting in a $500 reduction.  This individual would receive a payment of $700.  

If someone claims you as a dependent on their taxes, you are not eligible to receive a payment.  For example, if you are a young adult and attend college, but your parents still claim you as a dependent on their tax return, you would not be eligible to receive a payment.  

What do I need to do?  

You do not have to apply to receive a payment.  However, you must be a United States resident with a Social Security number and meet the above income criteria.  If the IRS has your bank account information from previous tax filings, you will receive a direct deposit.  If not, you will be mailed a check.

If you have not yet filed your 2018 income taxes, I would recommend doing so as soon as possible as this could affect the timeliness of receiving a stimulus check.  Per the IRS website: “Those without 2018 tax filings on record could potentially affect mailings of stimulus checks.”

When will I receive my payment?

This weighs heavily on everyone’s minds.  Many people need the money now.  Unfortunately, it won’t come right away.  According to Treasury Secretary Steven Mnuchin, he estimates most people should receive their payments in ~3 weeks.  I hope that is true, but we all know the pace at which the government works (think DMV).

Unemployment Insurance Expansion

The federal government is expanding upon the states’ unemployment programs.  In the words of Senate minority leader Chuck Schumer, this bill has “unemployment insurance on steroids.”  

Unemployment insurance benefits have been broadly expanded to include many people that would traditionally not be eligible.  This includes self-employed individuals, part-time workers, gig workers, freelancers, and independent contractors.  

Benefits also extend to those who are unemployed due to a diagnosis of COVID-19 or because they are caring for a family member who has been diagnosed.  Similarly, if you are unemployed because you have to stay at home due to self-quarantine or broader quarantine orders, you are eligible for benefits.  Likewise, if you are now unemployed because you have to take care of a child because they are no longer able to go to school or daycare because they are shut down, you would be eligible.  

How much would I receive and for how long?

The goal of the unemployment insurance expansion is to replace the income of the average American, which is ~$1000 per week.  So, the short answer to this question is, on average, about $1000 per week.

How did we get to this number?  The federal unemployment insurance expansion builds upon the programs the individual states already have in place.  Typically most states replace about 40-45% of average income, which would be approximately $400.  Based on this, the federal government will increase payments by $600 per week on top of what the states already provide.  This amount (~$400 + $600) would then replace the full income of the average American.  The total amount will vary state by state, with some states being more generous than others, but this is where the additional $600 comes from.  

The duration of benefits gets a little confusing, and also varies by state.  On average, states provide unemployment benefits for 26 weeks.  This bill would extend benefits by an additional 13 weeks, for a maximum total of 39 weeks.  Based on what I can find, this would only be for the regular state benefits.  The extra $600 from the federal government would last for up to 4 months and end on July 31st.

What do I need to do?  

You must file for unemployment through your individual state.  In doing some online searches, I think the easiest place to start is the U.S. Department of Labor website that has links to take you directly to the appropriate website for your individual state. 

When will I start receiving unemployment payments?

We have recently had a record number of people file for unemployment benefits throughout the country over the last week.  As a result, web sites are crashing and many are unable to submit their applications.  In response, many states are quickly hiring workers to process these applications.  So it may take some time, but still file.  I have seen reports of more people having success in the middle of the night when there is less web traffic.  

States have been incentivized to waive the traditional 1 week waiting period to receive unemployment benefits, so hopefully that will also help reduce the time to when people start receiving their payments.  

Once you begin receiving payments from your state, you would also receive the federal expansion payments.  It has been left up to the individual states whether this will come in one payment (combination of state and federal) or separate payments.  But whichever method your state chooses, it would still be weekly payments.

Student Loan Payment Changes

Millions of Americans carry student loan debt.  Student loans can significantly add to the financial stress and burden of this global pandemic.  While the federal government had already waived two months of interest and payments on federal student loans, the CARES Act further adds to this relief.  

Under this new legislation, those who carry federal student loans (direct loans) would not be required to make payments through September 30th, 2020.  Any interest that accrues during this 6 month period will also be waived.  This is essentially a 6 month nationwide forbearance.  

For those currently pursuing loan forgiveness programs, both Public Service Loan Forgiveness (PSLF) and Income-Driven Forgiveness (PAYE, REPAYE, IBR), the 6 months of suspended payments still get counted for a payment each month.

As further relief, the U.S. Department of Education will cease its collection practices for those that have defaulted on their federal student loans during this period.  This includes seizing portions of tax refunds and social security checks.

Will this apply to all my student loans?  

This provision applies to federal student loans (direct loans).  Any money borrowed from the federal government for higher education over the last 10 years should qualify. According to the Institute for College Access & Success, this comprises 90 percent of outstanding student loans.   This should also include consolidated federal student loans, but it has admittedly been difficult for me to find information on this.

Be aware, however, that this does NOT apply to Federal Family Educational (FFEL) Loans issued by the government then sold to private institutions, Perkins loans, state agency student loans, or private student loans.  If you have any of these types of student loans, I would recommend contacting your lender as there is a good chance they are also offering some form of relief program.

What do I need to do?

Likely nothing. This should happen automatically if you have federal student loans.  You likely haven’t seen any changes yet on your lender’s website since this is all evolving quickly.  You should, however, watch to make sure your account changes to show no payment is due and no interest is accruing.  

If you have automatic payments, those should stop as well.  However, my personality is such that I wouldn’t trust this to just happen.  I would keep a close eye on things.  If you definitely want your automatic payments to stop for the time being, I would just cancel them.  

Remember that even though payments aren’t due, you can still make payments if you so desire.  If you are in a financial position to do so, this could be a period where you could more rapidly pay down student loans because no interest is accruing, so all of your payments go towards the principal.  

Retirement Account Rule Changes

During these hard times, many are looking to tap into their nest egg to help weather the storm.  

The CARES Act allows you to withdraw up to $100,000 from employer sponsored retirement plans, such as your 401(k) or individual retirement accounts, for economic hardship without the normal 10% penalty, so long as the hardship was caused by the coronavirus pandemic.  This is being dubbed a coronavirus related distribution or CRD.  While you would still owe the taxes if this were from a non-Roth account, you could spread the tax payments out over a 3 year period.  You would also have the option to recontribute the amount back into your account over that 3 year period and avoid taxes.  To take advantage of the CRD, you would have to prove that you or a spouse/dependent has been diagnosed with COVID-19 or you have lost your job or source of income as a result of COVID-19.

Retirement plan loan rules have also been modified.  Account holders can now borrow up to $100,000 from their retirement accounts if affected by the pandemic (same burden of proof as above).  Normally you can only borrow no more than half of your account balance up to $50,000.  You would have 3 years to recontribute the amount of withdrawn funds back into your account without affecting the normal limits on contributions.   The benefit of taking a loan from your retirement account, rather than a hardship withdrawal like the CRD, is you would not owe taxes on the amount so long as you paid it back to your account within the allotted time.  

Should I access my retirement accounts right now?

I would caution people from jumping to these options.  Remember, we are in a bear market.  So if you liquidate your retirement account assets, in the form of a withdrawal or a loan, you are selling low and locking in your losses.  So I would only turn to this as a last resort.  

If you are age 70 1/2 or older, there is also a temporary waiver of required minimum distributions (RMDs) from your retirement accounts for the calendar year 2020.  This way you aren’t forced to sell investments in a down market, thereby locking in losses.  

Mortgage and Rent Payments

The CARES Act also serves to protect Americans from losing their homes during this global pandemic.  

There is a moratorium (temporary prohibition) on foreclosures of all federally related mortgage loans for 60 days beginning March 18, 2020.  This includes mortgages backed or owned by Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), or other federal agencies.  You can check with your lender to see if your mortgage falls under this category (it likely does).  But if it doesn’t, your lender is likely also making accommodations.  

Borrowers of federally backed mortgage loans facing economic hardship as a result of the pandemic can also request and receive forbearance of their mortgage payments for 180 days.  There is an option to extend for an additional 180 days if economic hardship persists.  During this period, lenders are prohibited from assessing fees, penalties, or interest above what would have been due if regular payments had been made.  

Renters also receive protection from the CARES Act.  There is a 120-day nationwide moratorium on evictions of any renters whose landlords have mortgages backed or owned by any of the aforementioned federal government entities.  While tenants will ultimately still need to pay their rent owed during this period, landlords are not allowed to charge any extra fees or penalties for missed rent payments during this period.  

What should I do if I can’t pay my mortgage/rent?

If you cannot make your mortgage or rent payment, contact your lender or landlord to work out a plan.  Don’t stick your head in the sand and just assume everything will be ok and work out.  If you don’t create a future payment plan, when this is all over you may be required to make a lump sum payment for all of the missed individual payments.  And if you can’t make that (which of course you wouldn’t be able to), there may not be any legislation in place protecting you from foreclosure or eviction.  Make the call today while there are protections for you in place.  

Conclusion

I hope this summary of the federal economic stimulus package was helpful.  Again, this is meant to be a broad overview to provide information.  Please consult with an appropriate financial professional before making any major financial decisions.

If you have any specific questions, please leave them in the comments section below or send me an email. 

Thanks for reading.  Please stay healthy and safe.  If you have any experiences that might help or uplift others, please leave them in the comments section below. 

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