If you are drowning in student loan debt along with huge credit card debt, you are not alone. According to “Majoring In Money,’’ 2019 report by student loan provider Sallie Mae, credit cards are popular among students. They have on average, 5 cards and their average credit card balance is $1,183.
Due to the sky-high education cost, most of the students have to take out a huge loan to complete their studies. Also, the lifestyle cost forces them to accumulate credit card debt. Now what?
You are shackled with multiple debts and looking for ways to get out of these pesky debt payments.
Remember, when you have multiple debts, then it is important to choose between paying one or the other. You have to prioritize paying off some debts faster than others. You have to decide which one to pay off first, student loans or credit cards. If you are not sure where to start, then you must read this article.
Learn how to prioritize your debts
You have to prioritize the debts that carry the highest interest rates. Because the highest interest rate debts will cost you more money. The longer you hold these debts, the more money you have to pay over the life of the loan.
But, don’t forget to make minimum payments on other debts. You have to make at least minimum payments to stay on top of both debts.
If you stop making payments, your credit score will drop severely.
Remember, 35% of your FICO score depends on the payment history. So, failing to make debt payments can hurt your credit score.
When should you focus on paying off credit card debts first?
If you are carrying high-interest credit card debt, you have to focus on paying off your credit card debts first.
Remember, credit card interest can add up quickly. Usually, credit cards have an APR that remains between 15%-20%. The higher the interest rate, the faster you can accumulate.
So, you have to compare your credit card interest rate with the student loan interest rate. Usually, federal student loans come with a lower interest rate (5.05%-7.6%). And, you have the option to extend the loan term.
Whereas, making a minimum to the credit card debt is not enough as the interest compounds. You have to repay the full balance, otherwise, it can be very difficult to get out of the vicious debt cycle.
Also carrying a high balance can hurt your credit score as the FICO score is depends on how much outstanding balance you owe.
How can you get out of credit card debt?
So, you have a higher interest rate credit card debt. And, you have decided to get out of your credit card debts first.
So, how can you get rid of them?
Here you go:
- Have more money in hand
To make extra payments to your credit card bill, you have to save more. To do so, you have to revisit your budget to cut extra costs. You have to find out extra money such as tax returns, bonuses, and a cash gift. You can also sell unwanted goods to get cash.
- Pick the right debt repayment strategy
There are many debt repayment strategies that you can follow to get rid of your credit card debts. The debt avalanche method is perfect to get rid of your higher interest debt. Whereas you can get rid of your debts one by one on your own by following a debt snowball strategy. You can also seek professional debt relief strategies to repay your debts. All you have to do is decide which one to follow.
- Follow the debt avalanche method to get rid of the highest interest rate debt
Debt avalanche method can help you to repay your higher interest debts. Avalanche payments can help you to pay off your private student loans as well.
In the debt avalanche method, you have to arrange your debts including private student loans in order of highest interest rate to the lowest interest rate.
Now, you need to make larger payments to the higher interest debt while making minimum payments to the rest of the debts in the list. Once you repay the highest interest rate, target the second highest interest. Start making larger payments to the second highest interest debt while making minimum payments to the other debts in the list. Continue the process until you repay all the debts on the list.
However, to manage this method, you need to have enough money in hand. Because you need to make larger payments to the target debt. So, before following this method, make sure you have enough money.
- Take out a consolidation loan
If you are facing difficulties in making debt payments while managing other monthly bills, then you can consolidate your debts. If you have private student loan debts, then you can consolidate these loans with your credit card debts as well. You just need to take out a consolidation loan so that you can repay all your debts. Now, you need to manage the new loan (Consolidation loan) properly. Make sure you make the monthly payments on time. Otherwise, you will fall into debt again, which can be fatal for your financial health.
Also, you need to take out a consolidation loan with a lower interest rate. Otherwise, you may end up paying more.
- Enroll in a debt consolidation program
Sometimes, you have to seek professional debt relief option. Because you may not be able to manage your debts on your own.
Getting a lower interest rate consolidation loan can be difficult for you. Since you already have so many debts in your name, the lender can deny to approve a higher interest rate loan. In such a situation, you can enroll in a debt consolidation program to consolidate your debts including your private student loans.
- Settle your debts
If you believe that you are not financially capable to repay all your credit card debts including your private student loan debts, then you have to consider debt settlement option. In a settlement program, you need to a reduced amount of debts to get rid of your debts.
Since the negotiation part in a settlement process is difficult, you can enroll in a debt settlement program. They can negotiate on your behalf to settle your debts successfully.
When should you focus on your student loan debts?
Well, as I have mentioned earlier that you shouldn’t stop making student loan payments while managing your credit card debts. Because federal student loans go into default after 270 days of non-payment. The lender can garnish your wages or tax return once they win the judgment.
So, making the monthly payments to your student loan is very important.
How can you manage your Federal student loan?
If you have a private student loan, then you can consider the above-mentioned ways to get rid of them. For Federal student loans, you have to consider the Federal student loan repayment options. You can’t settle or consolidate your Federal student loan through a debt relief program.
There are many plans that you can consider to reduce your student loan payments.
Here you go:
- Income-driven repayment
This plan can help you to reduce your monthly student loan payments. You can extend your loan term to 20-25 years. However, you may end up paying more in interest.
- Graduated repayment
This plan allows you to start with lower loan payments and then gradually increases every two years. The length of the loan is 12 to 30 years depending on the total amount of the loan. However, the payment on this plan can be less than 50% and no more than 150% of the monthly payment under the standard repayment plan.
- Income Contingent Repayment
This plan is based on the student’s income and the total amount of debt. The monthly payments are adjustable in every year depending on the student’s income. The loan term can be 25 years. And, the remaining balance will be discharged after 25 years. However, you have to pay the tax on the discharged amount.
- Deferment option
In deferment option, your loan can be frozen in time, which means the payment of principal and interest are deferred. However, only Federal Perkins Loans and subsidized Stafford Loans is in this option.
Also, this option depends on many conditions like
- There is an unemployment situation
- The student is attending undergraduate school full-time or at least half time
- The student is facing financial hardship for 3 years
- Refinance your student loan
Refinancing the student loan can be a good idea. In refinancing, usually, a lender pays off your current loans and provides you with a new one. However, you have to get a new loan with a lower interest rate. It also helps you to extend the loan term. Thus, you can manage the student loan while focusing on other debts. However, refinancing can result in paying more interest over the course of your loan.
However, you can shorten the loan term to avoid paying more interest. In that case, the monthly payments can increase. So, you have to decide which option is feasible for you.
In the end, you can see that paying off credit card debt first makes sense as they come with a sky-high interest rate that compounds. Also, there is a limited time to repay your credit card debts. Federal Student loan has a simple interest formula. You can choose the best repayment options according to your income to repay it. Also, Federal student loan can be wiped off through some Forgiveness Program. However, student loan forgiveness programs are based on many terms and conditions.
Above all, you should value all your debts and try to repay them as soon as possible. And, make sure you don’t accumulate credit card debts randomly as this can be a sign of having poor financial health.
About Mia: Mia Jones has a keen interest in blogging. After completing graduation, she has started establishing her identity by contributing articles on various platforms. Through her writing, she tries to provide a potential financial solution for ensuring financial health. Apart from writing, she also loves traveling, cooking, and gardening. Follow her on Twitter at @MiaJone96792889