Starting in October, borrowers will be required to resume making payments on their federal student loans after a payment pause that began in March 2020. Interest on the loans began accruing on September 1st.
As Americans prepare to restart their lives after the pandemic, they face a difficult financial situation. The Federal Reserve Bank of New York reports that credit card debt has reached an all-time high of $1 trillion. Moreover, student loan borrowers may find it challenging to manage different types of debt and prioritize accordingly.
If you’re looking to improve your financial situation, credit card debt can be particularly harmful due to the high, compounding interest rates. To ease the burden, consolidating your credit card debt into a zero- or low-interest product may be a wise choice.
Student Loan Borrowers Face Increased Debt
Many student loan borrowers are facing increased debt, as the cost of education continues to rise. With an average of over $30,000 in student loan debt, many are struggling to make ends meet and pay off their loans. This debt can have a significant impact on borrowers’ financial futures, making it difficult to save for retirement or purchase a home.
Increased debt for student loan borrowers
Borrowers who have been free from student loan bills for over three years may have utilized their budget to incur other forms of debt.
According to a study conducted by TransUnion in July, over half of the federal student loan borrowers opted for a new bank-issued credit card during the pandemic. In addition, 36% of them also applied for an auto loan and 31% signed up for a retail credit card.
According to TransUnion’s Senior VP of Consumer Lending, Liz Pagel, acquiring debt is a typical occurrence for young consumers as they enter into new credit obligations, such as obtaining their first credit card. Nevertheless, the pandemic led to an unprecedented surge in new credit issuances.
According to Pagel, lenders didn’t waste any time in making up for lost ground. In fact, they went above and beyond, adding more credit than ever before. Even consumers who had student loans in forbearance were not exempt from this trend.
According to the Consumer Financial Protection Bureau’s report in June, borrowers with student loans not only have to deal with new types of debt, but also more of it. The report shows that these borrowers face a 24% increase in median payments on other debt obligations compared to before the pandemic. For younger borrowers aged 18 to 29, median payments have skyrocketed by 252%.
In order to ease the transition, the Biden administration has introduced a 12-month “on-ramp.” This means that missed federal student loan payments will not be reported to credit bureaus and you will not default during this period. However, it’s important to note that loans will still accrue interest, so if you are able to, it’s recommended that you make payments.
Simplifying Credit Card Debt with Consolidation
Are you struggling with credit card debt? Consolidation may be the solution you need. By combining multiple credit card balances into one, you can simplify your payments and potentially reduce your interest rates.
Consolidating credit card debt
According to Rosario Chacon, a certified financial planner and certified student loan professional in Oakland, California, it’s essential to prioritize credit card repayment as you work towards paying off all your debts.
According to Chacon, in the worst-case scenario with the federal system, you can always ask for forbearance. However, when it comes to credit cards, there is no forbearance available to safeguard you.
Tricia Kollath, a certified financial planner and certified student loan professional in Gulfport, Mississippi, agrees that credit cards are much less flexible than the federal student loan system. She notes that you can’t simply call your credit card company and say, “I can’t make my payment this month,” as they may take legal action against you.
Chacon and Kollath advise assessing your budget right away to determine how to continue making payments towards your credit card debt as your student loan payments resume.
If you have good or excellent credit, you may be eligible for a 0% balance-transfer card. This type of card allows you to transfer your credit card balances to the new card and pay off the debt at zero interest during the promotional period, which can last up to 18 months or more. Keep in mind that these cards are not available to everyone and are generally only offered to borrowers with credit scores above 689.
Banks, credit unions, and online lenders offer fixed-rate debt consolidation loans to borrowers of all credit backgrounds. By qualifying for a rate that is lower than the rate on your credit cards, you can save a considerable amount of money on interest.
Alternative Approaches for Paying Off Credit Cards
If you’re looking to pay off your credit card debt, there are several strategies you can try. One option is snowballing your payments by targeting the card with the smallest balance first and then moving on to the next smallest balance. Another approach is to focus on paying off the card with the highest interest rate first, also known as the avalanche method. Consolidating your credit card debt into a single loan with a lower interest rate can also be a viable strategy. Lastly, you can negotiate with your credit card company to try and lower your interest rate or settle your debt for less than what you owe. Consider these options and choose the one that works best for your situation.
Other strategies to pay off credit cards
If consolidation is not feasible, there are several popular DIY strategies you can use to manage your debt. Two of the most common methods are the snowball and avalanche approaches.
Start by paying off your smallest debt first with the snowball strategy. As you pay off each debt, you’ll free up funds that can then be applied to the next debt. This builds momentum as the amount you’re paying on each debt increases, helping you work your way up towards paying off larger debts.
When using the avalanche strategy, you begin by paying off the debt with the highest interest rate. Then, you move down the list and apply your increased savings in interest to each new debt. This approach allows you to make the most of your payments and tackle your debts in a strategic and efficient manner.
According to the expert, people who are in debt often shy away from discussing their financial situation due to the overwhelming stress it brings. However, she believes that working towards paying off debts and achieving financial goals can have a positive impact on one’s mental health.
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