Should You Pay Off Credit Cards or Student Loans First?
Which do I tackle first? There is no easy, one-size-fits-all answer to this one. Simply put, it depends. There are many items to consider when coming up with any debt repayment strategy. You have to be sensitive to both your current budget and your future financial goals. This article will shed some light on the pros and cons of student loan vs. credit card debt, and hopefully help you apply the right repayment strategy for your specific situation.
Student Loan Debt
Affordable Interest Rates
Compared to credit cards, student loans carry a much lower interest rate on average. This means if your loan balance is roughly the same as your credit card balance, you’ll pay less total interest over the life of your student loan than you would on your credit card. Making the minimum payment on your student loan while paying that high-interest credit card off quicker can save you money in the long run.
Interest Paid is Tax-Deductible
Student loan debt is something the government sees as an investment in your future. If you meet the qualifications, you may be rewarded with a tax deduction for interest paid (up to $2,500) on your student loan throughout the year.
Student Loans are not Dischargeable in Bankruptcy
Some Student Loans Qualify for Forgiveness
Employers May Offer Student Loan Repayment Assistance
Credit Card Debt
A Good Way to Build and Boost Your Credit
Late Fees
High Interest Rates
Credit cards tend to have higher interest rates than student loans. According to creditcards.com, the national average interest rate for credit cards is 16.06% (as of 7/25/2017). Interest rates for federal and private student loans tend to be significantly lower.
TIP: If you were thinking of using a credit card to pay for tuition or other school related expenses, check out our article Should I Pay My Tuition With a Credit Card. And remember that private student loans not only offer competitive interest rates, but the funds can be used for more than just tuition. Private student loans can help with housing, transportation, laptops, books, and more. So explore all of your options before you default to using your card.
Repayment Strategies
Set Your Credit Card Bills up on Autopay
If you find yourself in a situation where you are carrying a balance on your credit card (i.e., not paying it off every month) one of the best ways to avoid late fees is to set up an automatic payment for your account. You can always pay more each month if you have the funds, but setting up an automatic payment will help to ensure that you get your bill paid on time each month.
Sign-Up for Auto-Debit for Your Student Loans
Most lenders offer a discount for borrowers who enroll in automatic debit. Discounts generally range from 0.25% to 0.50%. On a balance of any amount, but particularly high student loan balances, these small discounts can add up to big savings.
Pay More Than the Minimum
If you pay only the minimum on any debt, it will take longer to pay off and you will pay more in interest over time. Adding as little as five or ten dollars per month to the minimum due can make a noticeable difference in what you pay in interest over the life of the debt. Not only will you get out of debt quicker, but you will save money doing it. According to Andrew Thrasher, CMT and Portfolio Manager with Financial Enhancement Group, LLC, "You want to make sure at least minimum payments are being met on all debt. If a payment gets missed then even more problems and headaches can occur."
Assess Your Debt and Prioritize Repayment
There are a few different ways to approach debt. You may choose to pay off your highest interest rate debt first, putting all your extra available funds toward that debt (while maintaining minimum payments on everything else). This will save you money on the interest you pay overall.
Another popular approach is to pay off your debts from smallest to largest. This can help you eliminate smaller debts altogether, giving you the psychological boost by conquering your debts and crossing them off your list. Once one debt is paid off, take the amount you were paying on that debt and add that to the payment for the next debt on your list. You might not save as much mathematically, but this theory can create a lot of momentum and keep you focused on your goal.
Another option for making debt more manageable is student loan consolidation or private student loan refinance. Check out StudentLoanConsolidator for more information on federal and private student loan consolidation, to see if one of these options is right for you.
Whatever strategy you choose, having a strategy is key to not becoming overwhelmed.
What to do next?
Should I Refinance My Student Loans?
How to Refinance My Student Loans
Compare Featured Lenders
- Variable Rates: 1.13% APR - 11.23% APR. Fixed Rates: 4.25% APR - 12.59% APR. Lowest rates shown include the auto debit discount.1
- Choose from multiple repayment options, including no payments while in school1
- No origination fee or prepayment penalty2
- The only undergraduate student loan that offers 4 months of Chegg® study help --a $100 value6
1This loan is for undergraduate students at participating degree-granting schools. Students who are not U.S. citizens or U.S. permanent residents must reside in the U.S., attend a participating school in the U.S., apply with a creditworthy cosigner (who must be a U.S. citizen or U.S. permanent resident) and provide an unexpired government-issued photo ID to verify their identity. Applications are subject to a requested minimum loan amount of $1,000. Current credit and other eligibility criteria apply.
Interest is charged starting when money is sent to the school. With the Fixed and Deferred Repayment Options, the interest rate is higher than with the Interest Repayment Option and Unpaid Interest is added to the loan’s Current Principal at the end of the grace/separation period. Payments may be required during the grace/separation period depending on the repayment option selected. Variable rates may increase over the life of the loan. Advertised variable rates reflect the starting range of rates and may vary outside of that range over the life of the loan. Advertised APRs assume a $10,000 loan to a freshman with no other Sallie Mae loans.
2Although we do not charge a penalty or fee if you prepay your loan, any prepayment will be applied as outlined in your promissory note-first to Unpaid Fees and costs, then to Unpaid Interest, and then to Current Principal.
3The borrower or cosigner must enroll in auto debit through Sallie Mae to receive a 0.25 percentage point interest rate reduction benefit. This benefit applies only during active repayment for as long as the Current Amount Due or Designated Amount is successfully withdrawn from the authorized bank account each month. It may be suspended during forbearance or deferment, if available for the loan.
4Loan amount cannot exceed the cost of attendance less financial aid received as certified by the school. Sallie Mae reserves the right to approve a lower loan amount than the school-certified amount. Miscellaneous personal expenses (such as a laptop) may be included in the cost of attendance for students enrolled at least half time.
5Only the borrower may apply for cosigner release. Borrowers who meet the age of majority in their state may apply for cosigner release by providing proof of graduation (or completion of certification program), income, and U.S. citizenship or permanent residency (if your status has changed since you applied). In the last 12 months, the borrower must be current on all Sallie Mae serviced loans (including no hardship forbearances or modified repayment programs) and have paid ahead or made 12 on-time principal and interest payments on each loan requested for release. When the cosigner release application is processed, the borrower must demonstrate the ability to assume full responsibility of the loan(s) individually, and pass a credit review that demonstrates a satisfactory credit history including but not limited to no: open bankruptcy, open foreclosure, student loan(s) in default or 90 day delinquencies in the last 24 months. Requirements are subject to change.
6This promotional benefit is provided at no cost to borrowers with new loans that first disburse prior to April 30, 2021. Borrowers who reside in, attend school in, or borrow for a student attending school in Maine are not eligible for this benefit. Chegg Tutors offers One Free session of up to 60 minutes. A session will be considered redeemed if it has a minimum duration of thirty (30) minutes. Any minutes not used within the same session will expire upon conclusion of the session. No cash value. Terms and Conditions apply. Please visit Chegg.com/studystarter/termsandconditions for complete details. This offer expires one year after issuance.
7Borrowers and cosigners who have an available FICO® Score and a Sallie Mae loan with a current balance greater than $0, may receive their score quarterly after the first disbursement of their loan. The FICO® Score provided to you is the FICO® Score 8 based on TransUnion data, and is the same score that Sallie Mae uses, along with other information, to manage your account. FICO® Scores and associated educational content are provided solely for your own non-commercial personal review, use and benefit. This benefit may change or end in the future. FICO® is a registered trademark of the Fair Isaac Corporation in the United States and other countries.
Information advertised valid as of 4/1/2021
SALLIE MAE RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS, SERVICES, AND BENEFITS AT ANY TIME WITHOUT NOTICE. CHECK SALLIEMAE.COM FOR THE MOST UP-TO-DATE PRODUCT INFORMATION.
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- Competitive fixed and variable APRs starting at 1.04%1
- Multiple repayment options including: full principal and interest, interest-only, deferred, and flat payment
- Flexible payment terms ranging from 5, 8, 10, and 15 years2
- Coverage up to 100% of your school-certified cost of attendance ($1,000 minimum)3
- No origination, application and processing fees, no fees for early repayment
- Apply online in 3 minutes and get an instant credit decision
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
1Rates shown are for the College Ave Undergraduate Loan product and include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
2This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
3As certified by your school and less any other financial aid you might receive. Minimum $1,000.
Information advertised valid as of 4/22/2021. Variable interest rates may increase after consummation. Lowest advertised rates require selection of full principal and interest payments with the shortest available loan term.
- Competitive fixed & variable rates starting at 3.99% APR1
- Flexible 5, 10, or 15-year terms
- Award-winning customer service every step of the way
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). The following table displays the estimated monthly payment, total interest, and Annual Percentage Rates (APR) for a $10,000 loan. The Annual Percentage Rate (APR) shown for each in-school loan product reflects the accruing interest, the effect of one-time capitalization of interest at the end of a deferment period, a 2% origination fee, and the applicable Repayment Plan. All loans are eligible for a 0.25% reduction in interest rate (ACH discount) by agreeing to automatic payment withdrawals once in repayment, which is reflected in the APR shown for Full Principal and Interest Repayment Plan loans. Variable rates may increase after consummation. All variable rates are based on a 1-month LIBOR assumption of 0.99 as of April 25, 2017.
Under the Full Deferment Repayment Plan option, interest and principal may be deferred while a borrower is enrolled in school on at least a half time basis, and for an additional six month grace period (up to a maximum of 60 consecutive months) following (i) graduation, (ii) termination of enrollment, or (iii) if a borrower ceases enrollment on at least a half-time basis, at which time interest is capitalized and a 60-month repayment period (5-year term), a 120-month repayment period (10-year term) or a 180-month repayment period (15-year term) begins. There are three other Repayment Plan options available, an Interest Only Repayment plan, in which principal will be deferred and payments made on interest only during the same period described above after which payments will increase to full principal and interest payments, a Flat Repayment plan, in which payments of $25 will be made during the same period described above after which payments will increase to full principal and interest payments, and a Full Principal and Interest Repayment plan, in which payments will begin immediately after disbursement. A borrower's actual APR may vary depending on the repayment option selected by the borrower. The dollar amount of the origination fee is based on the amount borrowed and will be added to the outstanding loan balance upon disbursement. Loans are not offered or endorsed by the educational institution that you are attending. CommonBond is not affiliated with any educational institution.
For more information, visit https://commonbond.co/disclaimers#note3.