Which do I pay of first: Student Loans or Credit Cards?

Michael Lux Bankruptcy Articles, Best Of, Blog, Student Loans 0 Comments

For many borrowers of student loans find themselves also saddled with credit card debt.  The many differences between these two types of debt make it very difficult to decide which one is a bigger priority to pay off first.

A good rule of thumb for debt repayment is that the highest APR (interest rate) should come first.  For most individuals, that means knocking out the credit card deft first.  Unfortunately, there are lots of exceptions to this little rule.

In order to figure out what works best for you, consider these facts:

Certain student loans can be forgiven.  Depending on the type of loan and your repayment plan, forgiveness of your student loans is possible.  If you are enrolled in an eligible program, making minimum payments on your student loans while paying off credit card debt could be the best alternative.

A possible bankruptcy in your future could change things.  One of the perks about bankruptcy can be the discharge of your credit card debt.  Unfortunately, student loans are nearly impossible to get rid of in bankruptcy.  If you think you might end up in a situation years down the road where you are facing bankruptcy, you would much rather have credit card debt than student loan debt.  If bankruptcy is in your near future, discuss your options with your bankruptcy attorney.  Your lenders and the government will likely take issue if you try and game the system.

Paying off credit card debt can help your credit score more.  One of the big considerations in determining your credit score is the amount of revolving credit you have available.  The most common type of revolving credit is a credit card.  If your credit card debt is low compared to your available credit, it is very good for your score.  Surprisingly, paying off your student loans will not make as big of a difference in your credit score.  If you are planning a major purchase, such as a house, and you have some money to pay down debt to run up your credit score, paying off the credit card first will likely get you the most bang for your buck.

Student loan interest is tax deductible.  Lets say your credit card and student loans have the same interest rate.  Which do you pay off first?  If all other things were equal, you would want to pay off your credit card first.  This is because the interest that you pay on your student loans can be deducted from your taxes.  It doesn’t necessarily make a huge difference as it is a deduction and not a credit, but this difference can make next April 15 go a little better for you.

Ultimately, the direction you chose to go is totally up to you.  Perhaps you have a small student loan, but a large credit card debt.  You may feel best by giving yourself the satisfaction of entirely paying off one lender so that you have one less bill each month.

Paying off multiple types of debt can be costly and painful, but if you are smart about your approach, you can save yourself a lot of money in the long run.