Learn the Difference Between Student Loan and Credit Card Debt

Be Careful of What Type of Debt You Carry

a man's cupped hands hold letters spelling the word debt

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Debt can be good such as that used to purchase a quality education. However, it can also be destructive like when you live beyond your means using a credit card. 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. Debt can leave you feeling stressed out over all the collection calls and letters.

Student Loan Debt

For college students, some debt in the form of student loans may be unavoidable. It is worthwhile to be smart about determining how much debt to take on as you plan on and move through your college years. Once you look at the cost of attending your selected college and subtract any financial aid and scholarships they were able to obtain, you may find that there is 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 programs to help offset the costs. Think about picking up a side job or an 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 still need to consider borrowing money. Often this money will come in the form of student loans or—in some cases—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 Loans

Federal student loans are usually considered to be the first type of debt that you should acquire to fill the education funding gap. However, 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 federal loans usually have better interest rates, a wider variety of payment options, and certain opportunities—like the possibility to have the loan forgiven in some instances—these debts can also stay with you for a very long time. Also, because they involve the federal government, failure to pay could result in wage garnishment or forfeiture of federal income tax refunds.

Private Student Loans

If the federal student loans still do not cover the gap amount or you are not eligible for this funding, you may want to look into private student loans. These loans come from banks, credit unions or other private lenders. Most are quite competitive, but pay careful attention to fees and interest rates from the different lenders.

Again, find out whether interest is building up during your college years. You also need to understand that you might have fewer repayment options after graduation than are available through federal student loans. Further, the collection tactics upon failure to pay can become pretty aggressive, but they do not usually involve wage garnishment or refund forfeiture.

Credit Card Debt for College

Please don't make the common college freshman mistake of taking out credit cards and using them without thinking about the long-term consequences. You will find card issuers flocking to your door offering you their version of a student card, but resist the urge to sign on the dotted line.

Credit card interest starts accruing immediately and is often at a quite high rate. Payments are usually required immediately—or monthly—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.