Paying for College: Student Loans or Credit Cards?

Research conducted by student loan company Sallie Mae shows that in 2010, about 5 percent of college students paid an average of more than $2,000 in tuition and other educational expenses using a credit card to avoid taking out student loans. The same study showed that 6 percent of parents used credit cards to pay an average of nearly $5,000 in educational expenses for their college children.

Is using credit cards a smart way to avoid college loan debt? Financial advisors are in near-universal agreement that the answer is no, but that isn’t stopping thousands of families from using credit cards in place of parent and student loans.


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Some families might think that all debt is equal; others might think that they won’t qualify for college loans. So what advantages exactly do education loans offer over credit cards?

1) Availability

Particularly in the last few years, as credit card companies have tightened their credit requirements in a retraction of the lax lending that led to the foreclosure crisis, credit cards have become harder to qualify for, available mostly only to consumers with strong credit. Many consumers with weaker credit have had their credit lines reduced or eliminated altogether.


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Federal college loans, on the other hand, are available with minimal to no credit requirements. Government-funded Perkins loans and Stafford loans are issued to students in their own name without a credit check and with no income, employment, or co-signer required.

Federal parent loans, known as PLUS loans, have no income requirements and require only that you be free of major adverse credit items – a recent bankruptcy or foreclosure, defaulted federal education loans, and delinquencies of 90 days or more.

In other words, don’t turn to credit cards simply because you think you won’t qualify for school loans. Chances are, these days, you’re more likely to qualify for a federal college loan than for a credit card.

2) Fixed Interest Rates

While most credit cards carry variable interest rates, federal student and parent loans are fixed-rate loans. With a fixed interest rate, you have the security of knowing that your student loan rate and monthly payments won’t go up even when general interest rates do.

Many credit cards will also penalize you for late or missed payments by raising your interest rate. Federal school loans keep the same rate regardless of your payment history.

3) Deferred Repayment

Repayment on both federal student loans and federal parent loans can be postponed until six months after the student leaves school (nine months for Perkins undergraduate loans).

With credit cards, however, the bill is due right away, and the interest rate on a credit card balance is generally much higher than the interest rate charged on federal school loans.

If you’re experiencing financial hardship, federal loans also offer additional payment deferment and forbearance options that can allow you to postpone making payments until you’re back on your feet.

Even most private student loans – non-federal education loans offered by banks, credit unions, and other private lenders – offer you the option to defer making payments until after graduation.

Keep in mind, however, that even while your payments are deferred, the interest on these private student loans, as well as on federal parent loans and on unsubsidized federal student loans, will continue to accrue.

If the prospect makes you nervous of having deferred college loan debt that’s slowly growing from accumulating interest charges, talk to your lender about in-school prepayment options that can allow you to pay off at least the interest each month on your school loans so your balances don’t get any larger while you’re still in school.

4) Income-Based Repayment Options

Once you do begin repaying your college loans, federal loans offer extended and income-based repayment options.

Extended repayment plans give you more time to repay, reducing the amount you have to pay each month. An income-based repayment plan scales down your monthly payments to a certain allowable percentage of your income so that your student loan payments aren’t eating up more of your budget than you can live on.

Credit cards don’t offer this kind of repayment flexibility, regardless of your employment, income, or financial situation. Your credit card will require a minimum monthly payment, and if you don’t have the resources to pay it, your credit card company can begin collection activities to try to recover the money you owe them.

5) Tax Benefits

Any interest you pay on your parent or student loan debt may be tax-deductible. (You’ll need to file a 1040A or 1040 instead of a 1040EZ in order to take the student loan interest deduction.)

In contrast, the interest on credit card purchases, even when a credit card is used for otherwise deductible educational expenses, can’t be deducted.

To verify your eligibility for any tax benefits on your college loans, consult with a tax advisor or refer to Publication 970 of the IRS, “Tax Benefits for Education,” available on the IRS website.

6) Student Loan Forgiveness Programs

Whereas the only way to escape your current credit card debt is to have it written off in a bankruptcy, several loan forgiveness programs exist that provide partial or total student loan debt relief for eligible borrowers.

Typically, these loan forgiveness programs will pay off some or all of your undergraduate and graduate school loan debt in exchange for a commitment from you to work for a certain number of years in a high-demand or underserved area.

The federal government sponsors the Public Loan Forgiveness Program, which will write off any remaining federal education loan debt you have after you’ve worked for 10 years in a public-service job.

Other federal, state, and private loan forgiveness programs will pay off federal and private student loans for a variety of professionals – veterinarians, nurses, rural doctors, and public attorneys, among others.

Ask your employer and do a Web search for student loan forgiveness programs in your area of specialty.

Jeff Mictabor is an enthusiast on the topic of student loan issues in the news. He has been writing for the past 10 years for a variety of education publications. He now offers his writing services on a freelance basis.

Although most undergraduate students must provide their parents’ financial information when applying for federal financial aid for college, not all parents may want or be able to help their children pay for college. Colleges and universities, however, typically do expect parents to make some financial contribution to their dependent children’s college costs.

When applying for college aid, dependent students – those students who are claimed on someone else’s tax return – may be eligible, depending on their and their parents’ income, for federal grants and student aid, state-funded grants and school loans, and a school’s institutional student aid.

Graduate students and non-dependent undergraduates may also apply for federal, state, and institutional financial aid.

PLUS Parent Loans

In many cases, a financial aid package may not be enough to cover what your school expects you and your family to pay for college, even when combined with any scholarships and savings you’re bringing to the table.

If you’re an undergraduate and a dependent of your parents, and if your parents are willing to help you pay for college, they may be able to take out a federal parent loan – known as a PLUS loan – that can be used to pay for the cost of attending college.

PLUS parent loans are available in loan amounts that cover up to 100 percent of your certified cost of attendance.

PLUS Graduate Student Loans

PLUS loans, however, are no longer just for parents and their dependent undergraduates.

Beginning in 2006, the federal government opened up the PLUS program to graduate students as well. PLUS graduate student loans, known as Grad PLUS loans, can be used, like PLUS parent loans, to pay up to 100 percent of your certified cost of attendance.

Under federal rules, graduate students are automatically regarded as non-dependents and are thus ineligible for PLUS parent loans, which are only available to parents of undergraduates.

Grad PLUS loans offer graduate students an additional college financing option to scholarships, grants, fellowships, and federal Stafford graduate student aid.

PLUS Loan Eligibility

Eligibility for PLUS parent loans and graduate loans is determined, in part, by the information you submit on the FAFSA, the Free Application for Federal Student Aid. All students, both graduate and undergraduate, who are looking for federal financial aid for school must complete a FAFSA each year.

PLUS and Grad PLUS loans, unlike federal Perkins college loans and federal Stafford student loans, are credit-based loans that require a modest credit check.

In order to meet PLUS credit requirements, parent and graduate student applicants must be free of serious adverse credit items, such as a recent foreclosure or bankruptcy, significant delinquencies (defined as 90 days or more) on credit accounts, or a default on another federal parent or student loan.

Undergraduate students whose parents fail to qualify for a PLUS loan are eligible to receive additional money in federal student aid to help meet their expected family contribution to their college costs.

PLUS Loan Interest Rates

Loans made through the federal PLUS program allow you to borrow money for college at a fixed interest rate.

PLUS loans, both for parents and graduate students, currently carry a fixed interest rate of 7.9 percent. For graduate students looking at their graduate loan options, this rate is slightly higher than the fixed 6.8-percent rate available on federal Stafford graduate student aid.

PLUS and Grad PLUS loans are also subject to a 4-percent servicing fee, which is deducted from the loan proceeds at the time the loan is issued.

Repaying Your PLUS Loan

Until 2008, repayment on PLUS parent loans would begin 60 days after the loan funds were disbursed. However, under new legislation passed in 2008, parents may now defer repayment of their PLUS parent loans until their student graduates or leaves school, and for an additional grace period of six months following graduation.

The rules for PLUS graduate student loans are slightly different. As a graduate student, you may defer repayment on your Grad PLUS loans while you’re still in school at least half-time, but there’s no six-month grace period once you leave school. This timetable should be an important consideration and puts additional pressure on you to have a repayment plan in place before graduation.

Unlike some federal student loans, PLUS and Grad PLUS loans are not subsidized, so interest accrues on the loan balance from the time the loan is made, even if you’re currently deferring your loan payments.

The standard repayment term for PLUS and Grad PLUS loans is 10 years. You may, however, be able to extend your repayment term in order to lower your monthly loan payments. You can call the Department of Education to discuss repayment and extension options.

Loans issued under the PLUS program can be consolidated into a single federal consolidation loan, although parent loans must be consolidated separately from student loans. Parent loans can’t be commingled with student loans into a single account for the purposes of repayment.

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