Learn the Difference Between Student Loan and Credit Card Debt

Be Careful of What Type of Debt You Carry

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As college students start another year of classes one lesson they should all learn is how to use debt to achieve their 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. Once they looked at the cost of attending their selected college, and subtracted any college financial aid and scholarships they were able to obtain, they might have found that there was still a “gap amount” which needed to be paid. If the money was not available from parents or savings, they then had to consider borrowing money to bridge the gap. Often this money would come in the form of student loan or credit card debt. 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: One mistake many college freshmen make is 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.