Learn the Difference Between Student Loan and Credit Card Debt

Be Careful of What Type of Debt You Carry

jodi-okun-student-debt

As college students start another year of classes, there is one important lesson for everyone: How to use debt to achieve you goals. Debt can be good, but it can also be destructive. When planned for and used to make a major purchase like a car or home, debt can help spread the cost of purchases over longer periods of time. When used wantonly without regard to how repayment is going to be made, debt can cast a huge pall over your life.

It can affect your every monetary decision, and leave you feeling stressed out over all the collection calls and letters.

For college students, some debt in the form of student loans may be unavoidable, but it is worthwhile to be smart about determining how much debt to take on. Once you look at the cost of attending your selected college, and subtracted any college financial aid and scholarships they were able to obtain, you may find that there was still a “gap amount” to be paid. You likely can fill a portion of the gap amount with contributions from parents or your family's college savings. You should also consider investigating your school's work-study options or picking up a side job or internship to complement your studies. Lastly, you might even get creative by running a fundraising campaign using GoFundMe or CollegeBacker.

However, if the gap remains, you may need consider borrowing money to bridge the gap.

Often this money will come in the form of student loan or credit card debt. Considering the lasting value of an education and your potential future earnings, using debt to finance your education can be a great way to invest in yourself – but only if you manage it correctly. Learn the differences between these types of borrowing so you can make wiser financial decisions now and upon graduation.

  • Federal Student Loan Debt: This is usually considered to be the first type of debt that you should acquire to fill the gap amount, but you still need to be cautious about how much money you are borrowing over the course of your college career. Only borrow money that is needed to cover college expenses, and don’t look at this money as a type of “slush fund” to cover your day-to-day expenses. Be aware of whether you or your parents will be responsible for repaying these loans down the road. Look at whether interest is accruing or not while you are still in college. While they usually have better interest rates, a wider variety of payment options, and certain opportunities to have the loan forgiven, they can also stay with you for a very long time if you don’t make your payments. Because they involve the federal government, failure to pay could result in wage garnishment or forfeiture of federal income tax refunds.
  • Private Student Loan Debt: If the federal student loans still do not cover the gap amount, you may want to look into private student loans from banks, credit unions or private lenders. Most are quite competitive, but pay careful attention to fees and interest rates, and find out whether interest is building up during your college years. You might have fewer payment options upon graduation than are available through federal student loans. Collection tactics upon failure to pay can become pretty aggressive, but they do not usually involve wage garnishment or refund forfeiture.
  • Credit Card Debt: Please don't make the common college freshman mistake of taking out credit cards and using them without thinking about the long-term consequences! Interest starts accruing immediately and is often quite high. Payments are usually required immediately, and cannot be deferred until graduation. Most college students do not have a ready source of income to make payments on these credit cards, and begin to fall behind very quickly.

Debt should only be used to obtain a goal if you have thought through the entire process carefully. Calculate how much this expenditure is really going to cost you in the long run, and then make an informed decision about moving forward.

This article was updated by Abby Chao.