Should I use extra funds from my student loan to pay off credit card?

[Anonymous]

I am a grad student in education (as well as a teaching assistant at an ES). I have about $5K in credit card bills (mostly from living expenses when I was unemployed like health insurance, etc). I am eligible for more money in my Fed. Stafford Loan than I need to pay for my 2 grad classes. Does it make sense to use this extra money to pay off these credit cards? One credit card has an interest rate of about 13% and the other card is higher. TIA.

[Anonymous]

Call Dave Ramsey, he talks about that exact topic on his show every day!

[Anonymous]

How much is the interest for the student loan? Actually, I don't think you're supposed to use the funds to pay down your CC debt.

[Anonymous]

I think your Fed Stafford loans go directly to the school. I think you'd have to use a cost of living private loan to pay your CC.

[Anonymous]

The student loan money can go towards supporting yourself while in school. And, as any poor grad student knows, schools hand over the remaining funds (after tuition has been met) at the beginning of every semester. I think federal student loans now are locked in at 6.8%.

My two cents: I say pay it off, but consciously pay extra on your student loan debt. Since you're still in school you probably don't have a monthly loan bill, but I would act as if I did. You want to shake loose of that five grand as soon as possible. The interest may be lower but you may have made a greater effort to pay off the credit card more quickly. Wouldn't you hate to pay ten years in interest? It's too, too easy to let that happen. Also, what commitment are you making to yourself not to run up debt in the future? Could some of the money that would have gone to paying down those bills go instead to a serious savings fund in case you face the same situation?

Think strategically and go for it.

[Anonymous]

OP here. The student loan office told me that any extra funds after tuition can be dispersed to me. The reason for the debt is due to being unemployed for a while and currently underemployed. The market for new teachers is terrible. The counties around me are laying off teachers. I pay as much as I can currently on my credit card debt but it is usually not more than double the minimum each month.

[Anonymous]

Definitely! Use the money to pay off the higher-interest-rate credit card. The dispersal amount (after tuition) goes to you for your expenses. I would do it in a heart beat.

[Anonymous]

NO. Definitely not. The cardinal rule in lending is to never do the following as a borrower:

1) use recourse funding to get a better rate than non recourse
2) use secured debt to get a better rate than non secured
3) use non dischargeable in bankruptcy debt to get a better rate than debt that is dischargeable in bankruptcy

You would be violating #3. Student loan debt is not dischargeable in bankruptcy. Which makes the low interest still scary debt.

[Anonymous]

Anonymous wrote:NO. Definitely not. The cardinal rule in lending is to never do the following as a borrower:

1) use recourse funding to get a better rate than non recourse
2) use secured debt to get a better rate than non secured
3) use non dischargeable in bankruptcy debt to get a better rate than debt that is dischargeable in bankruptcy

You would be violating #3. Student loan debt is not dischargeable in bankruptcy. Which makes the low interest still scary debt.

I disagree with your analysis. The OP says she has $5K in credit card debt at high rates. Unless she reasonably anticipates filing bankruptcy, I think she should simply move the $5k to the lowest fixed rate she can, and work asap to pay it off. (She isn't going to file bankruptcy for a $5k CC debt- so why let that escalate at high interest rates?)

It is true though, student loans are the "new" credit card debt. It isn't good debt. No debt is good debt. Gosh I'd be happy to be done with our mortgage.

[Anonymous]

OP, how close are you to graduating? Once you graduate, six months later, your repayments of your student loan are going to kick in. You HAVE to pay them back and they are not dischargable in bankruptcy. You can string out your credit card debt but you can't put off repaying your student loans. If given this choice, I would not pay down credit card debt until you are working.

[Anonymous]

Anonymous wrote:OP here. The student loan office told me that any extra funds after tuition can be dispersed to me. The reason for the debt is due to being unemployed for a while and currently underemployed. The market for new teachers is terrible. The counties around me are laying off teachers. I pay as much as I can currently on my credit card debt but it is usually not more than double the minimum each month.

disbursed

[Anonymous]

Anonymous wrote:NO. Definitely not. The cardinal rule in lending is to never do the following as a borrower:

1) use recourse funding to get a better rate than non recourse
2) use secured debt to get a better rate than non secured
3) use non dischargeable in bankruptcy debt to get a better rate than debt that is dischargeable in bankruptcy

You would be violating #3. Student loan debt is not dischargeable in bankruptcy. Which makes the low interest still scary debt.

This only makes sense if you expect to default on loans or go into bankruptcy. As for #2, you're saying it would be better to get an unsecured loan to improve your house at 10% interest than it would to take a home equity loan at 5%.

As for your #3, if the OP made minimum payments on $5K of cc debt at 13% it would take 19 years to pay off at $112.50 per month and she would pay $4200 in interest. If she added $5K to her student loan at 6.8% and paid $57 per month she would pay it off in 10 years and pay $1900 in interest.

You may be right that these are the cardinal rules of "lending" because they are much more advantageous for the lender. They shouldn't be cardinal rules of borrowing, however, at least not for OP.

[Anonymous]

Personally, I'd do it - that, or I'd transfer the 5k to a non-interest credit card deal for 18mos and make a plan for paying it off entirely in that time - graduating from school with CC debt is the worst - student loans are more willing to work with you to help you pay them off over time.

[Anonymous]

Thanks for everyone's responses. I am going to transfer the bulk of it to a no interest for 18 months CC and then use a bit of extra FA money to pay off the rest of it.

[Anonymous]

Anonymous wrote:Thanks for everyone's responses. I am going to transfer the bulk of it to a no interest for 18 months CC and then use a bit of extra FA money to pay off the rest of it.

You said that you are not currently employed and the teaching field is laying off teachers so your chances of employment do not seem particularly rosy. The chances of you once again living off your credit card is almost 100%. You should talk with someone a little more saavy about finances.