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Reader Question: Student Loans and Credit Card Debt
By JLP | July 18, 2007
I was cleaning up my email folders tonight when I came across an email I received back in June from a reader. Here’s the email:
JLP,
I love reading your blog, and you answered my rollover IRA question so well, I thought I’d ask you another question.
Some background first: I’m 27 and hope to do applications this fall for grad school starting next fall (probably about $500 between all the fees). I have a bit under $6000 on one credit card with an interest rate of 2.99% (special rate, which when it expires, I’ll call to ask it be extended). I have $24,393 in Stafford loans at 4.25% locked in. These loans are in deferment for hardship right now, as last year I quit my job before I found a new one. I have a new job now, at a much lower salary, but sending me in the direction I want to be. I can pay all my bills and have enough left over to feed me, the cat, and have a touch of savings.
My question: This fall when my hardship deferment comes up for renewal, I’m not sure what to do. My goal is to get my credit card down as much as possible before I go back to school, but I’m not sure this is the wisest idea with my student loan debt. Do I keep my loans in deferral and keep hitting away at my credit card? Or do I take them out of deferment and send less to my credit card company? I’d also like to start saving a bit more than I have been for all those application fees. The thought of doing all three of these things feels financially overwhelming, though I know I could fit them all in my budget, albeit, at lower amounts than I would really want to.
Now that I’ve typed all this out, it feels like a stupid question, but it is still one that worries me. I’m asking you, and your readers, because two heads are better than one and I want to make sure I don’t miss something obvious.
Thanks, and thanks for all the stuff you write, I’ve learned a lot from you!
A. (a faithful reader)
Wow! A faithful reader! I like that.
Okay, here are my thoughts:
If you have to choose between one or the other, I would say to pay off the credit card first. Credit cards are quite risky because the rates can go through the ceiling if you make one mistake. With you going back to school and finances being tight, I would say getting rid of the credit card debt would be a smart move.
If your finances are tight and you are going back to school, I would also defer the student loans as long as you can but remember how much you owe and how much your payments will be once you graduate and have to start paying the loan back. Knowing this information will hopefully inspire you NOT to borrow more money or charge up credit card debt.
It’s been so long since I was in college that I’m really not up to speed on student borrowing. However, I did find some information about deferrals on the StaffordLoan website:
Loan deferment refers to a temporary period when a borrower is not required to make payments for an eligible reason. For Subsidized Stafford Loans, the interest that accrues on the loan during the deferment is paid by the federal government. For Unsubsidized Stafford Loans, the interest that accrues during a deferment must be paid by the borrower during or after the deferment period.
As a borrower under the federal loan program, you are entitled to a certain number of deferments of your monthly payment provided you meet the criteria and complete the appropriate documentation. One such example is if you became unemployed. You are entitled to unemployment deferments for a specific period of time. Another would be if you entered repayment and then went back to school at least half time in an eligible program, you would be eligible for an “In school” deferment.
For more information on deferral of federal student loans, click here.
Good luck with your school this fall and thanks for being a faithful reader! Just be sure and tell all your new college friends about AllFinancialMatters.com!
Topics: College Funding, Credit, Credit Cards |