Credit cards and student loans have got many Americans under debt. Don’t spend $100,000 on an English or Humanities degree – that is pretty dumb! Which one should you pay off first for better financial management is a million dollar question!
It is amazing these high schools don’t educate these kids on these issues. Many college degrees don’t lead to high paying jobs. How come these pitiful occupy Wall Street buffoons cannot figure that out?
Though no one is protesting anymore like that because there are jobs everywhere thanks to the tax cuts and job destroying regulations have been getting cut.
A Loan that does not Go Away
You might want to take care of your credit cards first to free up available credit. However, doing that will leave your student loans lagging behind in payments. It can get particularly messy if you have a federal student loan outstanding.
It is never a good idea to focus on paying back just one loan. However, financial constraints could make it difficult for you to pay more than the minimum balance amount for multiple loans.
Here is the face-off between credit card debt and student loans. A breakdown of the two loans and factors affecting them will make it easier for you to determine your best debt management strategy.
Cost is important to understand which debt is pricier to keep around. Credit card debts have high interest rates as compared with student loan debts. Hence, this makes credit cards more expensive. The average Annual Percentage Rate or APR in student loans is just 6.8% as compared to credit card APR of 17%.
However, student loan interests come with tax benefits. The amount you pay off is above the line tax deduction. You can take the deduction even without itemizing it. Credit card interests are not tax deductible till the time a card is not solely used for educational purposes.
It is costlier to keep a credit card debt as compared to a student loan. The accrued interest is more in credit cards and not tax deductible.
Credit cards are not flexible when it comes to repayment schedules. All you have is the one option to make monthly minimum payments to keep your credit in good standing.
However, credit card balances come with high interests which tend to accrue over time. This can make it difficult to catch up without a sound and flexible repayment schedule.
On the other hand, student loans have more flexible repayment options. There are a number of repayment plans you can choose from.
Features such as forbearance and deferment are useful if you decide to enroll into school again or require an extension. Income based repayment plans for student loans vary monthly payments based on expenses and income.
For these reasons, where repayment schedule is concerned, it is better to get credit card debts out of the way first. You have more options with student loans depending upon your financial standing.
Bankruptcy and Settlement
Credit card debts can be easily discharged in bankruptcy. They do not require proof that paying the debt will cause you to live below the minimum standard of living.
You do not even have to show proof that you tried working out a repayment plan with your lender to make payments.
However, this burden of proof is huge with student loans. They are relatively more difficult to discharge in bankruptcy. That said some student loans fall under the forgiveness program that cancels all or some part of the debt if you are eligible.
Needless to say, the only forgiveness with credit cards is settlements with the lender. However, these settlements are uncommon and very bad for your credit score. Lenders do not easily entertain settlement agreements if your account is in good standing.
Credit cards make a huge negative impact on your credit score if you settle or have it discharged under bankruptcy. Student loans on the other hand can be filed for forgiveness or discharged under bankruptcy. Hence, you should try paying off your credit cards first.
Both these debts are unsecured which means there is collateral tied to them like with car loans or mortgages. In the event of non-payments, a lender cannot repossess your property.
Your credit score is affected in both kinds of debt. Also, lenders in both debt situations will hire a third party collector after months of non-payment.
However, if you have federal student loans, then your federal tax refunds may be applied towards repayment. Hence, you are at a loss by not paying off your federal student loans.
It is vital that you don’t borrow money unless you know what you are seeking is what you want to do. It is very expensive to change majors. Not only that, changing majors also keeps you in school for a much longer time. But you also don’t want to obtain a major in a field that you don’t want to be in. No one said this was easy!
Paying Due Balances
Credit cards are more difficult to catch up on in regards to past due payments. Though it is easier to pay off than someone like Tony Soprano! David Scatino knows all about that!
A lender will not allow you to bring your account current once it is charged off. You will not be able to continue with payments. Student loan lenders provide more options for catching up on past due payments.
Your student loan lender might proactively apply forbearance to your account that effectively cancels out all missed payments.
A lender might also allow you to get all caught up by adding past due payments to your current monthly installments. This results in higher monthly payments, but, you get to clear all due balances.
Credit card issuers are less lenient when it comes to making overdue payments. It is better to not fall back on these payments. Student loans are easier to catch up with. Many lenders allow rehabilitating a student loan to bring it current again.
Future Credit Options
Lenders perceive student loans in a more favorable light as compared to credit card debts. Student loans are a type of self-investment where you increase your educational qualifications. You are more likely to get approved for loans with student loans than pending credit card debts.
That said there are certain situations where student loans can do more harm than good. For instance, if you have a high student loan debt, then you might not be able afford any other loan obligations. In any case, lenders are more lenient in their approval policy with student loans for mortgages and car loans.
Credit card balances are typically lower than student loans. They also come with a higher interest rate and more rigid repayment schedules. Therefore, it is usually better to pay off credit card bills first if you want to knock out the expensive debts quickly.
You also get to free up available credit by taking care of credit card payments first. The only time you should pay off your student loan first is if you have a federal student loan and are at a risk of losing your federal tax refund.