Whenever I see a college commencement ceremony, I think of all those young people so full of high hopes – and student loans. I read not long ago that college graduates begin life with an average of $30,000 in student loan debts. Since this is an average, it means there are some who are graduating with student loans of less than $5000 and others owing more than $50,000.
How to repay those loans
I recently saw a question posed by a young woman wondering if it was best to pay off her loan or sign up for credit cards and use them to pay it off. She had an outstanding balance of $22,000 and a 6.6% interest rate. She has been paying about $2,000 in interest each year.
Her payments will drop
Do the math and you’ll see that her interest is $1,452 a year. If she makes interest-only payments, her balance will never down. However, if she pays more than just the $1,452, she should see her payments reduced because she will be paying down principal over time.
Managing multiple credit cards
If you were to get a collection of credit cards to lower the interest costs on your student debt, this would have its own set of extra risks. For example, since you would not be transferring your balances from one card to another, you would have to find one that has a teaser rate on a cash advance. Also, if you apply for multiple credit cards over a short period of time your credit score will be negatively impacted.. In turn, this will make it even harder to qualify for that great credit card offer. You would also give up any tax deductibility of the interest payments and possibly some other loan payment options.
Stay where you are
If you have a student loan with a fixed interest rate of 6.6% or something comparable, your best solution would probably be to stay with the loan. It’s just much easier to manage one payment on that loan then payments on multiple credit cards. You should try to make additional principal payments each month so you could chop away at your outstanding loan balance. You should also set a target date for paying off your student loan.
The worst thing you could do
If you do the math and find you could cut your is a you interest costs by switching from a student loan to multiple credit cards, this might be a viable option. However, the one option you don’t want to choose is to default on that loan. Defaulting on a student loan has very dire consequences. You could have your tax refunds seized and used to help pay down your balance or could even see your paycheck garnished. Your loan could be turned over to a private debt collection agency and you could end up being sued. If the agency could get a judgment against you – which is most likely – it could put a lien on one or more of your assets, including your house. Collection fees of up to 20% can be put on top of placements, which could turn a 10-year loan into a 20-year-loan.
Even a bankruptcy won’t help
Even a chapter 7 bankruptcy will not eliminate your student loan debt or debts. While these are not secured debts, they fall into the same category as taxes owed and child support payments. They simply can’t be dismissed. You may be able to get a deferment, a forbearance or a reduction in your monthly payments but bankruptcy is not the answer.