Student Loan Or Credit Card Debt?
If you’re struggling to keep up with credit card debt, you’re not alone. If you have the dual Mt. Everest of student loan and credit card debt to climb, the need to make on-time payments is even more crucial to your financial future.
Falling behind on either one (and obviously both) is more than a slippery slope in high winds. Defaulting on credit card debt and/or student loan debt can cripple your credit score, making it exponentially more difficult to get credit in the future by driving the interest rate so high that borrowing money isn’t even a reasonable option.
That’s no small snowball effect. That’s an avalanche.
You must find ways to make on-time payments. Relying on the political campaign promise of student loan debt forgiveness is like playing the lottery — an exciting possibility but the opposite of a financial plan.
In speaking at a conference for college financial aid administrators, Richard Cordray, Chief Operating Officer of Federal Student Aid, talked about targeted student loan forgiveness but would not comment on what he termed “general” student loan forgiveness.
“I will simply say it is a decision for the White House to make, not for me,” Cordray told his audience. “And, whatever they decide, FSA will faithfully implement.”
Student loan debt can be daunting. But since credit card debt most often carries higher interest rates, experts recommend that those borrowers (especially with a large balance) consider paying off credit card debt first.
Credit Card Debt Relief
Credit card debt in America hit an all-time high in the final quarter of 2019, dropped dramatically during the first year of the COVID-19 pandemic, then went back on the rise in 2021. The latest data from the Federal Reserve Bank of New York put credit card debt at $800 billion and showed a higher delinquency rate among younger (age 18-29) consumers during the same time period.
The need to tackle credit card debt is greater than ever. Here are some options for how to do that:
- A balance transfer credit card – It may sound counter intuitive to address credit card debt by getting another credit card, but if your credit is still rated as good (at the minimum), this can be an option. It offers the opportunity to make interest-free payments for a designated period of time. While there’s often a limit on how much debt you can transfer, some balance transfer cards offer as long as 21 months of interest-free payments. Having a repayment plan is crucial. If you haven’t paid off the debt by the time the interest free period expires, the standard interest rate (16% or higher) kicks in and you’re right back in the boat rowing upstream again.
- Negotiate a lower rate with your credit card company – It could be worth a try but it will require more than a winning personality. A history of on-time payments is a really good conversation opener. It shows a sense of responsibility and companies don’t want to lose responsible customers.
- A personal loan – Taking out a personal loan could help consolidate credit card debt and offer savings since the interest rates on personal loans, while not zero, are often significantly lower than credit card interest rates. Again, a good credit score is highly recommended to secure a fixed-rate loan that helps you eliminate credit card debt.
- Borrow from a friend or family – While this may seem like a good idea because the lender knows you, tread lightly. The pitfalls of borrowing from a friend or family are many. Make sure to reach a mutually agreeable repayment plan up front – and put it in writing! – so you reduce misunderstandings and conflicts.
- Use your home equity – Many people who own a home have enough equity (amount your home is currently worth minus amount you still owe) to borrow against and use the money to pay off credit card debt. Big Warning: You are putting your home up as collateral and if you don’t repay the loan, you could lose your house to foreclosure.
- Get counseling help – Contact a nonprofit credit counseling agency where a qualified credit counselor can help you analyze your current income and expenses and come up with a budget that has room for eliminating debt. A debt management program may be one solution to help you with your credit card debt. A debt management program consolidates your debts, without having to take out a new loan. You’ll have one manageable monthly payment. If you’re fighting debt on more than one front, this may help you make more room in your budget to tackle your student loan debt.
Student Loan Debt Relief
If you’re trying to repay student loans while also carrying credit card debt, it’s understandable if you’re struggling. The good news (relatively speaking) is that the number of student loan repayment plans is nowhere near as short as your money might be.
There are many strategies to reduce student loan payments. Federal Student Aid, an office of the U.S. Department of Education, recommends contacting your loan servicer to discuss repayment plans or change your existing repayment plan.
The options in brief:
- Standard Repayment Plan – All borrowers are eligible. It offers fixed amount payments. Loans paid off within 10 years, or within 30 years for consolidated loans. Check here for eligible loans for all repayment plans.
- Graduated Repayment Plan – All borrowers are eligible. Payments start out lower, then increase typically every two years. Eligible loans are the same as the standard repayment plan, but you’ll pay more over the 10-year repayment period (and 30-year expiration on consolidation loans.)
- Extended Repayment Plan – Direct Loan borrowers must carry more than $30,000 in Direct Loans to be eligible. The difference between this plan and the fixed and graduated plans isn’t the type of payment. You could make fixed or graduated payments. The difference is the length of the repayment period (25 years).
- Revised Pay As You Earn Repayment Plan (REPAYE) – Monthly payments are 10% of your discretionary income. Requires you to update your income and family size on an annual basis and payments are recalculated based on that. Income and loan debt of your spouse is also considered even if you file taxes separately. Outstanding balances on your loan will be forgiven after 20 years (undergraduate loans) or 25 (post-grad). You may have to pay taxes on the forgiven loan amount.
- Pay As You Earn Repayment Plan (PAYE) – The terms of PAYE loan are also updated annually based on income and family size and also amount to 10% of your discretionary income. But you won’t pay more monthly than you would have paid under the 10-Year Standard Repayment Plan. Under this plan, your spouse’s income and loan debt is only considered if you file your taxes jointly. One caveat: you must be a new borrower on or after Oct. 1, 2007 and have received a disbursement of a Direct Loan on or after Oct. 1, 2011. Loan forgiveness on outstanding balances kicks in after 20 years.
- Income-Based Repayment Plan (IBR) – Like the PAYE plan, you must have high debt relative to your income. Depending on when you received your first loans, you’ll pay either 10% or 15% of your discretionary income but never more than the 10-Year Standard Repayment Plan. The terms of the loan forgiveness standard (20 or 25 years) is also dependent on when the loan started. A spouse’s income and loan debt are considered only if you file taxes jointly. As with the other loan options, you could pay taxes on the amount of the loan forgiveness.
- Income-Contingent Repayment Plan (ICR) – The monthly payment for a Direct Loan borrower is the lesser of two amounts: 20% of your discretionary income or the amount you would pay on a 12-year fixed plan, according to your income. This plan carries the standard annual recalculation and a 25-year forgiveness on outstanding balances. The spousal consideration of income and loan debt applies to joint tax filings or if you are repaying your Direct Loans jointly with your spouse.
- Income-Sensitive Repayment Plan (ISR) – This plan is limited to borrowers on the Federal Family Education Loan Program and to those loans which are not eligible for Public Service Loan Forgiveness. It carries full repayment in 15 years with a monthly payment based on your annual income.
What about deferment? It’s more of a last resort in a short-term financial bind than a long-range strategy since in most cases interest will keep accruing while you take a break from making payments..
There are exceptions. For example, the Student Loan Payment Pause. The U.S. Department of Education announced a final extension of COVID-19 emergency relief for student loans until January 2022. The pause offered a suspension of loan payments, a 0% interest rate and stopped collections on defaulted eligible loans.
But for the vast majority of borrowers, student loan deferment or forbearance means you will pay more over the life of the loan because interest will accrue while you’re not making payments.
Also, if you are on course for loan forgiveness, any period of deferment or forbearance will likely stall your progress until you resume repayments.
The latest research from Education Data Initiative reveals 43.2 million Americans carry student loan debt, and the average amount is $39,351.
According to the most recent data from the Federal Reserve’s Survey of Consumer Finances, the average credit card debt of U.S. families is $6,270. Only mortgage debt surpasses the burden of credit card debt and student loan debt for borrowers.
Those numbers underscore the need to manage debt by making on-time payments. It can be a daunting challenge, one best met by meeting with experienced credit counselor at a nonprofit credit counseling agency like InCharge Debt Solutions.
Your student loan may be cancelled (considered closed and paid) if it meets the following criteria:
- You become permanently disabled.
- The school that you attended closed while you were attending or within 90 days of your departure from the school.
- National Defense Student Loans can be cancelled in return for full-time teaching or military service.
- Stafford and Perkins Loans can be cancelled if you teach in a low-income school.
- In rare circumstances, the obligation to repay your loan may be cancelled in the event of bankruptcy. However, most student loans continue to be your responsibility even if you declare bankruptcy.
Direct student loans can be forgiven through the Public Service Loan Forgiveness program. Under this program, certain public service employment can qualify you for loan forgiveness after making 120 payments on certain repayment programs. Learn more about this Public Service Loan Forgiveness program.
What Percent of College Students Have Credit Card Debt?
The average college student carries $1,183 in credit card debt, according to Sallie Mae’s study “Majoring in Money, 2019.” Obviously, the Covid-19 pandemic happened since Sallie Mae’s previous report in 2016 and introduced some unique challenges for everyone. The $1,183 in average credit card debt is a 31% increase.
It’s a modest number compared to the average household credit card debt of $6,270 but it’s not so small given the limited incomes of so many college students. Compounding credit card interest can become a burden especially if you’re trying to pay down student loan debt concurrently.
According to the survey, nearly 58 %of college students said they got their first credit card for the purpose of establishing credit, which qualifies as good intentions compared to alternatives … like, say, a spring break shopping spree.
The majority of cardholders (60%) say they pay their bills in full on a monthly basis. Considering that so many college students will soon face student loan debt payments, credit card discipline is another good sign.
About The Author
In his 40-plus-year newspaper career, George Morris has written about just about everything -- Super Bowls, evangelists, World War II veterans and ordinary people with extraordinary tales. His work has received multiple honors from the Society of Professional Journalists, the Louisiana-Mississippi Associated Press and the Louisiana Press Association. He avoids debt when he can and pays it off quickly when he can't, and he's only too happy to suggest how you might do the same.
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