If you have student loans and credit card debt, you’re likely feeling overwhelmed and unsure if you’re headed for a financial crisis of your own. And it’s no wonder – personal debt loads are increasing faster than ever before!
In 2018, the average college student graduated with about $29,800 in student loan debt. This amounts to about $393 in student loan payments each month, without including interest. The average interest rate on student loans is 5.05 percent, which adds about $23 to the monthly student loan bill.
Meanwhile, the average U.S. household owes an estimated $8,750 in credit card debt, at an average interest rate of about 15 percent.
As you can imagine, those with credit card debt and student loans frequently struggle to stay afloat financially. And when so much of your hard-earned money is spent paying off debt, it becomes a whole other challenge to stay motivated to pay off debt, let alone save for the future or afford a mortgage.
Luckily, there are financial tools and strategies you can take advantage of to lower your student loan payments, tackle troublesome credit card debt, and become one step closer to becoming debt free.
Student Loans + Credit Card Debt
There are many different strategies when it comes to paying off student loans. But when you have student loans and credit card debt, it’s usually better to work on paying off credit card debt first.
Here’s why: Credit card debt usually has a higher interest rate than student loans. In other words, it costs you more to pay off credit card debt than it does to pay off a student loan.
Credit card debt also is considered a “bad” debt compared to student loans. The reason being, having credit card debt usually means you were living beyond your means – spending more than you earned or could afford to spend.
Student loans on the other hand, are usually viewed as an investment in yourself. While you may be in debt now, that debt oftentimes results in higher earnings later in life. In other words, the value of your education will appreciate over time.
Given that student loan payments are already at budget-busting levels for many consumers, the key to paying off student loans and credit card debt is to temporarily change our student loan repayment plan to one that costs us less each month.
The idea here is that by lowering the student loan bill, you’ll have more cash on hand to throw towards paying off your credit card debt. Once your credit card debt is paid off, you’ll be able to use the money you were using to pay off your credit cards to pay off your student loans.
How to Get Started
If you are struggling to repay federal student loans, or if your federal student loan payments take up an overwhelming proportion of your budget, there are several student loan repayment plans that could better your financial situation.
You see, when you first begin to pay off your federal student loans, you’re automatically assigned to a repayment plan. Most consumers are put on the Standard Repayment Plan, aka the basic repayment plan, when we graduate.
Under this plan, consumers experience higher monthly payments, but will also pay the least amount of interest as this plan pays off your loan in the shortest amount of time.
But did you know that once you make your first repayment on your student loans, you’re eligible to change repayment plans at any time – for free?!
For consumers with credit card debt, consolidating your student loans is one way to temporarily lower your student loan payment so you can focus on attacking your credit card debt, says Gina Sansavero Training Manager at the San Diego-based student loan repayment servicer Docupop.
What is Student Loan Consolidation?
Student loan consolidation is a way to simplify multiple student loan payments into one monthly payment.
College graduates typically have between 10-12 student loans from at least three of the nine student loan servicers. This means 44 million Americans have at least three separate student loan payments per month, all with varied monthly payment amounts, interest rates, and due dates.
If that sounds like a lot to keep track of, you’re absolutely right!
By consolidating your student debt, you’ll have just one-monthly student loan payment, with one fixed interest rate and one due date.
It’s important to note that federal consolidation programs won’t allow you to add private loans, but some private lenders will allow you to consolidate federal and private loans together.
Student loan consolidation can be done on your own through the Education Department website or through a student loan repayment servicer like the one Sansavero works for, Docupop.
“We help people with student loans in the same way that H&R Block helps people with their taxes,” Sansavero said. “We spend hours on the phone with consumers to create a customized repayment plan for their student loans, discussing each individual’s options with them.”
Once an individual settles on their new repayment plan, a student loan repayment servicer will inform the consumer of their new monthly student loan payment, complete the repayment plan application paperwork, as well as handle the annual renewals on behalf of the consumer.
“We’ll also ask you about your financial goals,” Sansavero added, explaining that if an individual is trying to buy a house for example, a student loan servicer may have other repayment suggestions
Using Student Loan Consolidation to Pay Down Other Debt
Arguably the biggest advantage of consolidating your student loans is a lower payment, which allows you to more aggressively tackle other debts like credit card debt, which usually has larger interest rates attached to it.
Given credit cards tend to have higher interest rates than student loans (15 percent average vs 5 percent average, respectively), by tackling the more expensive credit card debt first, you’ll likely save money in the long run.
If you consolidate your student loans and are able to lower your interest rate on your student loans further, use the money you’re saving on your student loans and apply it to your credit card balance. By increasing the payment provided to the credit card companies, you’re not only lowering the principal, you’re also lessening how much you’re paying in interest by paying off the credit card debt faster.
Once your credit card debt is paid off, you can use the money you were paying toward that balance to pay off your student loans. A bonus is that by paying off your credit card debt first, you may be even more motivated to tackle the last of your debt with even greater enthusiasm.
What about a Deferment or Forbearance?
While there are a handful of other options when it comes to either delaying or decreasing your student loan payments, you want to be sure you understand exactly how your financial situation will be impacted – both positive and negative – by these payment plans before you agree to them.
For example, in the third quarter of 2018, 2.6 million student loan recipients had paused payments on their federally managed student loans in the form of forbearance because they were unable to make the monthly payments.
But putting your student loans into forbearance comes at a cost. You see, in order for your student loans to go into forbearance, the caveat is interest will continue to accrue on your debt while those payments are not being made. This means each month you miss a payment, your total balance will continue to increase.
Finding a New Repayment Plan
In addition to the standard repayment plan, there are a handful of other repayment plans offered by the Education Department including:
- Graduated Repayment – This plan gives you up to 25 years to repay what you owe. Payments can be fixed or graduated, meaning you’ll gradually pay more per month the longer you have your loan. The idea is that you may not be making much when you originally graduate college, but in a few years, your salary will allow for greater payments. Word of caution, you’ll pay more interest on this plan than any other repayment plan.
- Income-Based Repayment (IBR) – With this plan, payments are set at 10 to 15 percent of your discretionary income. You must have a high debt amount relative to your income to qualify for this repayment plan, as one of the benefits of this plan is that all unpaid interest from the first three years you had your student loan will be forgiven.
- Income-Contingent Repayment – Payments are 20 percent of your discretionary income, or they can be the amount you would pay on a repayment plan with a fixed payment over 12 years. That number is adjusted according to your income.
- Pay As You Earn (PAYE) – Payments are capped at 10 percent of your discretionary income. After 20 years of repayment, any remaining balance could be forgiven. To qualify, you must be experiencing a financial hardship
- Revised Pay As You Earn (REPAYE) – Created in Dec. 2015, this income driven repayment plan was designed to remove some restrictions from the PAYE plan, as well as adding some additional benefits. On this plan, payments are calculated based on your household income and family size, and are capped at 10 percent of your discretionary income.
To get the process started, you can contact a private company specializing in student loan repayment options or use the Federal Student Aid repayment estimator.
What if I Have Private Student Loans?
If you have private or non-federal student loans, you will not be eligible for the federal student loan repayment plans. However, there still are repayment programs available to you.
The Consumer financial Protection Bureau has more information on their website, including the most common non-federal student loan repayment plans:
- Graduated Repayment: A plan where payments start out lower and gradually increase over time. The idea is you’ll eventually start earning more and then will be able to afford to pay off a greater portion of your student loans.
- Extended Repayment: A plan where your monthly payment gets sizably reduced. The catch is you’ll be paying off your student loan for a longer period of time.
If you’re interested in lowering your student loan payments to more aggressively pay off your credit card debt, call DebtWave Credit Counseling, Inc. at 888-686-4040.