Student Loans vs. Credit Cards–What Should You Pay Off First?

If you are carrying debt on your credit cards or you owe on your student loans, the amount can be overwhelming. The average American household carrying credit card debt owes nearly $15,700. And, if you have student loan debt, that average number more than triples to $46,600.

In the quest to become debt free, you may be tempted to pay off your student loans first because they represent the largest portion of your personal debt. However, there are benefits to prolonging your student loan repayment that you need to consider before creating your budget.

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According to a new study from Taxslayer, 42% of taxpayers plan to use their upcoming tax refunds to pay off outstanding debts, including student loans and credit cards. Student loans typically have a much lower interest rate than credit cards. Currently, the interest rate for federal student loans for undergraduates is 4.45%. This is similar to the interest on a mortgage loan, which most homeowners spend 30 years repaying.

But credit card interest rates currently average over 15%.

The longer you carry this high interest credit card debt, the more money you will pay in outrageous interest penalties. You are better off paying down your credit card balance than you are paying off your low interest student loan. Once you have the credit card paid off, you can use the money you were putting toward the card balance each month to pay on the principal of your student loans. It may take a while to pay off, but you will gradually see your debt decline.

As tempting as it is to pay off student loans quickly, you should postpone paying any more than the minimum payment until your high-interest debts are cleared. Some student loan repayment programs include loan forgiveness after 20 or 25 years, which means you could have part of your debt wiped clean without repaying it.

Sara Molina from American Financial Benefits Center says, “Slow repayment may seem discouraging for some borrowers. But in reality, taking a long time to repay or get forgiveness means you’re working on other important financial goals, or simply doing the best you can.”