In this article, we will compare student loan debt and credit card debt and determine which one should be paid off first. We will review several important repayment factors and assign points to the debt that falls short in each category. The debt that ends up with the most points is the one you should pay off first.
Consequences of Non-Payment
Both student loans and credit cards are types of unsecured debt. This means that there is no collateral tied to the debt like a mortgage or auto loan. If you miss a payment, the creditor or lender cannot automatically reclaim any of your property to settle the debt.
Note: If you have federal student loans, non-payment may lead to wage garnishment or the loss of federal income tax refunds.
Non-payment will affect your credit score. After several months of non-payment, the creditor or lender may hire a third-party collection agency to pursue the debt. You can be sued for the outstanding debt, and a lawsuit may result in a judgment against you. With a judgment, the court may grant wage garnishment or bank account seizure. This collection path can occur with late credit card payments or late student loan payments.
Judgment: The possibility of tax refund garnishment makes non-payment of student loans slightly worse. Student loans earn a point in this round.
Result: Student Loans: 1, Credit Cards: 0
Debt Discharge Ability
One of the biggest differences between student loans and credit cards is the ease of discharging credit card debt in case of default. Student loan debt can be discharged if you default, but it requires a more difficult demonstration.
You must prove that repaying the debt would cause you to live below the minimum standard of living, that you are unable to make payments for a substantial part of the repayment term, and that you have already tried (without success) to reach a repayment plan with the lender. This level of proof is generally not required to discharge credit card debt in case of default.
Some student loans are eligible for forgiveness programs that eliminate some or all of the debt. This type of debt cancellation is not available with credit cards.
Note: Discharged debt is generally considered taxable income by the Internal Revenue Service. However, as part of the American Rescue Plan Act of 2021, you will not have to pay income tax on discharged student loan debt until the end of 2025.
In some cases, credit card issuers may forgive part of the outstanding balance as part of a settlement agreement that you negotiate.
However, this type of settlement agreement is uncommon, harms your credit score, and is usually only made with delinquent credit card accounts. If your account is in good standing, the credit card issuer will not consider a settlement agreement.
Judgment: Student loans can be forgiven and discharged in case of default (in some cases). Credit cards lose in this category because the only options for discharging the debt – bankruptcy and debt settlement – harm your credit score.
Result: Student Loans: 1, Credit Cards: 1
Repayment Flexibility
Student loan repayment options are much more flexible than those available for credit cards. Lenders often have numerous repayment plans that you can choose based on your ability to pay. For example, most lenders offer an income-driven repayment plan that can change based on your income and expenses. The lender may also extend deferment and forbearance options if you are unable to make monthly payments or if you return to school.
It starts
Credit card interest is due immediately and often comes with a very high interest rate. It also typically requires payments to be made immediately or monthly and cannot be deferred until graduation like some student loans. Credit cards have a low minimum payment that you must make each month to keep your credit card in good standing. You can optionally pay more than the minimum to pay off the balance earlier.
If you are unable to afford the minimum payment on your credit card, you do not have many options. Some credit card issuers offer hardship programs that lower the interest rate and monthly payment. However, unfortunately, these programs are often only available if you have already fallen behind on your monthly payments.
Note: Consumer credit counseling is another option for managing your credit card payments. However, you may have to give up your credit cards (at least temporarily) if you join a debt management plan with a credit counseling service.
Verdict: Student loans have m
Source: https://www.thebalancemoney.com/pay-student-loans-or-credit-cards-4134687
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