Paying for College: Student Loans or Credit Cards?
Research by student loan company Sallie Mae shows that in 2010, about 5 percent of college students paid an average of more than $ 2,000 in tuition and other educational expenses using a credit card to avoid obtaining student loans. The same study showed that 6 percent of parents used credit cards to pay an average of nearly $ 5,000 in educational expenses for their children in college.
Is Using Credit Cards A Smart Way To Avoid College Loan Debt? Financial advisers almost agree that the answer is no, but that doesn’t stop thousands of families from using credit cards instead of parent and student loans.
Some families may think that all debts are the same; others may think they will not qualify for college loans. So what exactly are the advantages of educational loans over credit cards?
Particularly in recent years, as credit card companies have tightened their credit requirements in a lax loan retraction that led to the foreclosure crisis, credit cards have become more difficult to qualify, mainly available only for consumers with strong credit. Many consumers with weaker credit have had their lines of credit reduced or eliminated entirely.
Federal college loans, on the other hand, are available with minimal or no credit requirements. Government funded Perkins and Stafford loans are made to students in their own name with no credit check and no need for income, employment, or co-signer.
Federal parent loans, known as PLUS loans, have no income requirements and only require you to be free of significant adverse credit elements: a recent bankruptcy or foreclosure, federal student loans delinquent, and delinquency of 90 days or more.
In other words, don’t turn to credit cards simply because you think you won’t qualify for school loans. Chances are, these days you are more likely to qualify for a federal college loan than a credit card.
2) Fixed interest rates
While most credit cards have variable interest rates, federal student and parent loans are fixed-rate loans. With a fixed interest rate, you have the security of knowing that your student loan rate and monthly payments will not increase even when general interest rates do.
Many credit cards will also penalize you for late or late payments by increasing your interest rate. Federal school loans keep the same rate regardless of your payment history.
3) Deferred refund
Repayment of federal student loans and federal parent loans can be postponed for up to six months after the student leaves school (nine months for Perkins undergraduate loans).
However, with credit cards, the bill is due immediately, and the interest rate on a credit card balance is generally much higher than the interest rate charged on federal school loans.
If you are struggling financially, federal loans also offer additional deferral and forbearance options that can allow you to postpone payments until you recover.
Even most private student loans (non-federal education loans offered by banks, credit unions, and other private lenders) offer you the option of deferring payments until after graduation.
However, keep in mind that even if your payments are deferred, the interest on these private student loans, as well as federal parent loans and unsubsidized federal student loans, will continue to increase.
If the prospect makes you nervous about having deferred college loan debt that grows slowly due to accrued interest charges, talk to your lender about early payment options at school that can allow you to pay at least interest each month of your school loans to balance your balances. don’t get bigger while you’re in school.
4) Income-based payment options
Once you start paying off your college loans, federal loans offer extended, income-based repayment options.
Extended payment plans give you more time to pay, reducing the amount you have to pay each month. An income-based payment plan reduces your monthly payments to a certain allowable percentage of your income so that your student loan payments don’t eat up more of your budget than you can live with.
Credit cards don’t offer this kind of payment flexibility, regardless of your job, income, or financial situation. Your credit card will require a minimum monthly payment, and if you do not have the resources to pay it, your credit card company may begin collection activities to try to recover the money you owe them.
5) Tax benefits
Any interest you pay on your parent’s debt or student loans may be tax deductible. (You will need to file a 1040A or 1040 instead of a 1040EZ in order to take the student loan interest deduction.)
In contrast, interest on credit card purchases, even when using a credit card for educational expenses that would otherwise be deductible, cannot be deducted.
To verify your eligibility for any tax benefits on your college loans, consult a tax advisor or refer to IRS Publication 970, “Tax Benefits for Education,” available on the IRS website.
6) Student loan forgiveness programs
While the only way to escape your current credit card debt is to pay it off in bankruptcy, there are several loan forgiveness programs that provide partial or full relief of student loan debt for eligible borrowers.
Typically, these loan forgiveness programs will pay off some or all of your undergraduate and graduate loan debt in exchange for your commitment to work for a certain number of years in a high-demand or underserved area.
The federal government sponsors the Public Loan Forgiveness Program, which will pay off any federal education loan debt you have after you’ve worked for 10 years in public service employment.
Other federal, state, and private loan forgiveness programs will pay off federal and private student loans for a variety of professionals: veterinarians, nurses, rural doctors, and public attorneys, among others.
Ask your employer and do an Internet search for student loan forgiveness programs in your area of expertise.