Paying for College: Student Loans or Credit Cards?

Research conducted by student loan company Sallie Mae shows that in 2010, about 5 percent of college students paid an average of more than $2,000 in tuition and other educational expenses using a credit card to avoid taking out student loans. The same study showed that 6 percent of parents used credit cards to pay an average of nearly $5,000 in educational expenses for their college children.

Is using credit cards a smart way to avoid college loan debt? Financial advisors are in near-universal agreement that the answer is no, but that isn’t stopping thousands of families from using credit cards in place of parent and student loans.

Some families might think that all debt is equal; others might think that they won’t qualify for college loans. So what advantages exactly do education loans offer over credit cards?

1) Availability

Particularly in the last few years, as credit card companies have tightened their credit requirements in a retraction of the lax lending that led to the foreclosure crisis, credit cards have become harder to qualify for, available mostly only to consumers with strong credit. Many consumers with weaker credit have had their credit lines reduced or eliminated altogether.

Federal college loans, on the other hand, are available with minimal to no credit requirements. Government-funded Perkins loans and Stafford loans are issued to students in their own name without a credit check and with no income, employment, or co-signer required.

Federal parent loans, known as PLUS loans, have no income requirements and require only that you be free of major adverse credit items – a recent bankruptcy or foreclosure, defaulted federal education loans, and delinquencies of 90 days or more.

In other words, don’t turn to credit cards simply because you think you won’t qualify for school loans. Chances are, these days, you’re more likely to qualify for a federal college loan than for a credit card.

2) Fixed Interest Rates

While most credit cards carry variable interest rates, federal student and parent loans are fixed-rate loans. With a fixed interest rate, you have the security of knowing that your student loan rate and monthly payments won’t go up even when general interest rates do.

Many credit cards will also penalize you for late or missed payments by raising your interest rate. Federal school loans keep the same rate regardless of your payment history.

3) Deferred Repayment

Repayment on both federal student loans and federal parent loans can be postponed until six months after the student leaves school (nine months for Perkins undergraduate loans).

With credit cards, however, the bill is due right away, and the interest rate on a credit card balance is generally much higher than the interest rate charged on federal school loans.

If you’re experiencing financial hardship, federal loans also offer additional payment deferment and forbearance options that can allow you to postpone making payments until you’re back on your feet.

Even most private student loans – non-federal education loans offered by banks, credit unions, and other private lenders – offer you the option to defer making payments until after graduation.

Keep in mind, however, that even while your payments are deferred, the interest on these private student loans, as well as on federal parent loans and on unsubsidized federal student loans, will continue to accrue.

If the prospect makes you nervous of having deferred college loan debt that’s slowly growing from accumulating interest charges, talk to your lender about in-school prepayment options that can allow you to pay off at least the interest each month on your school loans so your balances don’t get any larger while you’re still in school.

4) Income-Based Repayment Options

Once you do begin repaying your college loans, federal loans offer extended and income-based repayment options.

Extended repayment plans give you more time to repay, reducing the amount you have to pay each month. An income-based repayment plan scales down your monthly payments to a certain allowable percentage of your income so that your student loan payments aren’t eating up more of your budget than you can live on.

Credit cards don’t offer this kind of repayment flexibility, regardless of your employment, income, or financial situation. Your credit card will require a minimum monthly payment, and if you don’t have the resources to pay it, your credit card company can begin collection activities to try to recover the money you owe them.

5) Tax Benefits

Any interest you pay on your parent or student loan debt may be tax-deductible. (You’ll need to file a 1040A or 1040 instead of a 1040EZ in order to take the student loan interest deduction.)

In contrast, the interest on credit card purchases, even when a credit card is used for otherwise deductible educational expenses, can’t be deducted.

To verify your eligibility for any tax benefits on your college loans, consult with a tax advisor or refer to Publication 970 of the IRS, “Tax Benefits for Education,” available on the IRS website.

6) Student Loan Forgiveness Programs

Whereas the only way to escape your current credit card debt is to have it written off in a bankruptcy, several loan forgiveness programs exist that provide partial or total student loan debt relief for eligible borrowers.

Typically, these loan forgiveness programs will pay off some or all of your undergraduate and graduate school loan debt in exchange for a commitment from you to work for a certain number of years in a high-demand or underserved area.

The federal government sponsors the Public Loan Forgiveness Program, which will write off any remaining federal education loan debt you have after you’ve worked for 10 years in a public-service job.

Other federal, state, and private loan forgiveness programs will pay off federal and private student loans for a variety of professionals – veterinarians, nurses, rural doctors, and public attorneys, among others.

Loan Repayment

Loan repayment can seem to be a difficult thing to undertake at times. Unfortunately, securing a loan for your needs may be the best option to achieve your goals. Whether your goals include schooling, business expansion, or even home expansion, in order to get the money required to achieve it, you may have to apply for a loan. This means undertaking a loan. However, it may not be as hard as you currently think it is. There are many options that make loan repayment as easy for you as possible, depending upon many factors. Most of the time, it will narrow down to exactly what type of loan you secure.

When it comes to education, most Americans these days can not afford to pay the cost of tuition. They find themselves in a situation where they have to either give up on their dreams of higher education or get a school loan. The loan repayment process on a school loan can actually make it much easier to handle than most other loans. In general, most school loan plans allow the student to go to and finish their schooling. They won’t even begin to expect any repayment until sometimes 6 months after the student has completed schooling. This gives you the chance to use the education you received in order to find a job that is in your given field of study, which it is generally assumed, will be of higher pay than average jobs. This allows you to prepare for a loan, rather than just having to jump right into it.

A home improvement loan has a different set of loan repayment options. Home improvements usually add to the value of the home, which can increase the value of the homeowner. In order to secure a home improvement loan, it may be a good idea to try for a mortgage loan. This way, any other loans you have against the house will be grouped together, making the repayment a single payment. If you go this route, you may find that you add much less per month than you would if you had a separate loan. The good thing is that if you do improve the value of your home, future loans will offer much better terms. This planning for the future is an important habit to get used to.

The loan repayment options for a business loan aren’t generally that flexible. However, the advantages of a business loan can far outweigh the downside of any potential repayment issues. Because the loan is being used to start or expand a business, the implications are that the business is going to be making more money. This potential to increase profits will set you in a position to even complete the repayment process ahead of schedule. Early loan payment will usually save money, since the interest rates are negated when paying early. As an added bonus, the successful completion of a business loan will give you better rates the next time you want to secure a loan.

There are many different types of loan repayment options available to most everyone today. The type of loan you try to secure will often dictate which potential loan terms you face. School loans will often not require a loan repayment until after the schooling is completed to allow you the chance to begin earning enough to pay it back without breaking the bank. A home improvement loan can often be bundled with an existing mortgage, saving a large amount of interest. Business loans will often allow you to increase your earning potential, thus making the loan payment process much easier to handle. The best option is to choose the type of loan you need, and research the best way to secure that loan, in order to receive the best repayment options you can.