It is common for a graduate to step out of college with a couple of debts to their name: the most popular ones being student loans and credit cards. It is actually a sad picture because they have so much debt even before they have the means to pay for it. The more the student failed to save for college, the more they will owe when they graduate.
With a job market that has yet to evoke a feeling of confidence, the new graduates are stepping into jobs that fail to deliver salary expectations. When this happens, they are forced to prioritize their debt payments. But seeing how both student loans and credit cards can be destructive when left without payments, it is tough to make a choice between them.
Should you pay your student debt or credit card debt?
The thing about these two debts is there are consequences when you default on payments. As a young credit holder, you want to make sure that you build up a strong start for your credit history. Well that will not be met if you have to choose between your credit card and your student loans. But just for the sake of educating you, let us discuss what happens when you default on either of these debt types.
What happens when you do not pay your student loans?
People perceive students loans to be good debts due to the fact that it increases your ability to earn more. When you invest if yourself, that is something that no one, not even a struggling economy can take from you. However, that also encourages students to rack up a huge amount of debt while in college.
When you graduate, you are given 6 months to look for a job and stabilize your finances before the billing comes in. Once the bills start to arrive, you are faced with a monthly payment contribution that usually takes 10 years to complete.
In case you default on your student loans, the following can happen:
Your wages can be garnished.
Your tax refund can be intercepted.
Your federal benefits can be taken (e.g. Social Security).
You can be sued by the federal government or private lender.
You will have trouble getting insurance, utilities and even renting a decent apartment.
You will be asked to pay your student loans in full – without installment options.
You cannot use forbearance or deferment.
Your credit score can be damaged.
You will lose the eligibility to avail of student loan financial aid.
These are among the top consequences of defaulting on your student loans. The longer you go without payments, the more your debt will increase. And the scary part about this is, you cannot have it discharged when you file for bankruptcy.
What happens when you do not pay your credit cards?
On the other hand, your credit card debt can also make your life a bit difficult simply by having a high interest rate. The high finance charge that comes with this interest can quickly grow your debt. This is why introducing credit cards to college students is a tricky thing to do. While it can help them take care of daily and unexpected expenses, it can be easily abused. If that happens, the cardholder could suffer a high debt on both student loans and credit cards.
So what are the consequences of defaulting on your credit cards?
Your debt will accumulate quickly – thanks to the finance charges.
Your credit score will go down. Creditors are quick to report you to credit bureaus so you can expect your score to reflect your inability to make payments.
You will start to receive collection calls.
It seems like a small list but you will be surprised at how destructive these three can be for someone’s finances. And what makes it even more dangerous is you can be in so much debt and still use the card. That can really mess up with your financial life. This is probably why some people call this one of the bad debts.
Debt relief options to help deal with both credit cards and student loans
Although there may be instances wherein you are tempted to choose between the two, you don’t have to. Your resources may be limited but there are debt solutions that will help you keep up with both payments.
First off, you may want to check out how much you really owe. There are various tools that you can use online like the FinAid.org student loan payment calculator or the Bankrate.com credit card payoff calculator. When you have an idea of your debt situation, you can determine how much you can afford to pay for each.
Once that is settled, you can choose a debt relief option that you can use to make debt payments easier to manage. Here are our suggestions.
Debt Consolidation Loan. There is no way you can combine student loans and credit cards but you can use debt consolidation loan for each of them. If you have multiple lenders and creditors, at least you can consolidate your debts into two payments. Not only that, you could be left with a lower monthly payment with lower interest rates – on both counts.
Debt Management. This is another option but only for your credit cards. It also consolidates your debts but this time, you work with a credit counselor. They will help you create a debt management plan that shows your low monthly payment proposal that is stretched over a longer payment period. This will be presented to the creditor and when approved, you will send a single payment to the counselor. They will take charge of sending your payments over to the different creditors on your plan.