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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 |
July 18th, 2007 at 6:42 am
I am in a similar position: I worked for a while after graduating with my BS before going to graduate school. I had the Unsubsidized Stafford loans.
Here’s what happened to me: Coming out of undergrad, the loans went into repayment (after a grace period of about 6 months). Upon entering grad school full time, my school automatically reported to the loan agency I was full time and my loan went into deferment. It will stay in deferment as long as I can prove (or my school proves) that I am a full-time student.
IMHO, there is no reason to remove the deferment status. Since I have an unsubsidized loan, the interest does accrue while it is in deferment but… you can always choose to pay that interest off as it accrues without affecting the deferment status. Of course, paying off the interest is very important so that it doesn’t eventually become capitalized (when the loan reverts to repayment). Also, since the interest is for a student loan, the interest payments are tax deductible (usual rules apply). I’m pretty sure you can also pay back principle without affecting the deferment status but check with the loan agent on that one.
July 18th, 2007 at 8:35 am
Wait, the reader can’t just barely pay their bills, they aren’t making any payments on their student loans, AND now they want to go back to school and take on more debt?
If they can’t make their debt payments now, why do they think they are ready to take on more?
July 18th, 2007 at 8:44 am
Yeah, Savvy makes a great point that I failed to address and that’s:
Why do you want to go back to school in the first place? What will the master’s degree accomplish for you?
Those are important questions to answer.
July 18th, 2007 at 9:20 am
It appears as though everyone is approaching this from their own perspective (not surprising) since the reader left out one critical point: What is the goal of going to grad school? Masters? Doctorate?
Since I’m going for my doctorate (in chemistry), I assumed doctorate. Those with MBA’s assumed masters. The situation is vastly different for each goal, especially since full-time Ph.D. students can get stipends (at least in the science) that cover (minimally) living expenses and pay for classes. On the other hand, masters programs must come out of his own pocket. The important question to ask is “will this new degree really help my career?”
July 18th, 2007 at 11:02 am
Okay, I will second the comments that other posters have asked about what type of grad school? $500 seems like a lot, how many programs is this person applying to? If you are going back to school, there is no reason to not put the loans in deferment: you can pay off both accruing interest and principal with no penalty on Stafford (government) loans. This will vary for private lenders, so it’s best to check first. Also if you do go into repayment, some programs will give you a little bit off of your rate, if you sign up for automatic payment.
All that being said if you’ve just started a job that you like and have financial issues to resolve, then I don’t see what the rush is to going back to school. Why not wait until Fall 2009 to start and spend the next two years paying off the credit cards and paying down the student loans.
@Charles, there are some science programs that will pay stipends for Master’s programs, so if he is going for a Master’s it might not necessarily be coming out of his pocket. I do agree that he must ask if this new degree will really help his career, and is the cost (money and time) worth it.
July 18th, 2007 at 11:11 am
Yay! Thanks JLP for posting my question. I had a feeling I was making the right choice, but really needed the input of someone with more knowledge than I.
To respond to savvy, as long as I maintain my now frugal lifestyle, my stipend in grad school should be enough for me to live off of. I’ll be going for a PhD in Microbiology. I don’t want to be a tech doing someone else’s research for the rest of my life, so getting a PhD will allow me the opportunity to set up my own lab and teach at the University level. I could just do a masters, but like Charles said, it would have to come out of pocket. And in my field all a masters would get me is a higher tech position than I have now, but no real advancement.
July 19th, 2007 at 9:56 pm
You can only defer your student loans a certain number of times (I believe 3) so make good use of them. Student loans won’t hurt your credit score as much as CC debt, so that is something to consider.
If you do get into grad school, I’d avoid defering the loan before starting b/c like Charles said they’ll automatically go back to deferment and you can simply pay the monthly interest while using the difference to pay down you CC.
July 20th, 2007 at 4:34 pm
As someone who is half-way through his MBA, I too faced the deferment issue.
1) Yes, you can continue to pay principle and interest without affecting your deferment status (at least on Stafford loans).
2) Have you considered school part time instead of full-time (or full-time student, full-time employee)? I am not familiar with Microbiology PhD programs, so this may not work, but MANY employers will help you pay for your schooling, which can protect you from additional debt. If your stipend affords to everything you need, and you can quit your job, then this wouldn’t make sense. For me, my employer pays 80% of a private institution tuition and 100% of a public institution tuition, up to a total of $100,000. For my MBA, my employer will have covered roughly $80,000 for me, with no future commitment required. If your employer doesn’t do this, remember that there are employers who might, and a job change might be the best way to reach your education goals without sacrificing your financial well-being.
3) I disagree with putting off going back to school for another year. It is so hard to get motivated to go back to school that if you have the energy now, do it. You may not have that passion next year, and it seems your education will pay off in the long run. Most people who talk about going back for Masters/Doctorate never do, and many who begin applying quit before they ever get enrolled.
4) Since you mentioned it is just you and your cat, I am assuming you are unmarried/unattached and without kids. This is the time in your life that you can be selfish and get something done for yourself. It will be so much harder if you wait until you have a family (assuming you desire one).
Good luck!
August 1st, 2007 at 3:50 am
A credit card is a system of payment named after the small plastic card issued to users of the system. A credit card is different from a debit card in that it does not remove money from the user’s account after every transaction. In the case of credit cards, the issuer lends money to the consumer (or the user). It is also different from a charge card (though this name is sometimes used by the public to describe credit cards), which requires the balance to be paid in full each month. In contrast, a credit card allows the consumer to ‘revolve’ their balance, at the cost of having interest charged. Most credit cards are the same shape and size, as specified by the ISO 7810 standard. http://usacreditcards.cn/
August 15th, 2007 at 1:14 pm
I think Thomas was right. A student loan seems to be more viable than credit cards. But before considering these things you need to know how to build your credit score first.
July 18th, 2008 at 4:50 pm
There is a some good colleges where every student want to study but the problem they face is of finance. Those who have financial problem they are not be able to take admission in the good colleges. There is only one way for them and that is to take loan. So many student took loan for their study.
peter
Debt Consolidation
September 14th, 2008 at 6:06 am
Before u getting your 1st student loan..
KNOW YOUR LOANS: FEDERAL VS. PRIVATE
Though federal and private loans are both eligible for consolidation, federal loans have superior rates and terms, which are set by the government. However, federal and private loans must be consolidated separately.
Federal Loans Have Favorable Terms
There are several types of federal loans that can be consolidated. These include:
* Stafford loan
* Perkins
* Parent PLUS
* Supplemental Loans for Students (SLSs)
* Health Professions Student Loans (HPSLs)
* Loans for Disadvantaged Students (LDSs)
* Nursing Student Loans (NSLs)
* Health Education Assistance Loans (HEALs)
Different loans carry different interest rates. Some are fixed, some are variable. While it’s possible to consolidate fixed–and variable-rate loans to a fixed rate.
Student Loan Consolidation rebate