Before paying off your debts by taking out student loans, consider the consequences.
Ever take out a federal student loan and think to yourself, “Hey – I should take out a little extra and pay off my credit cards!”
How did that work out for you?
It’s a smart move to get an education, especially in this hyper-competitive world.
And it’s easy to get federal student loan money to ease the burden.
But before you pay off your credit cards with federal student loan money, consider this.
Federal Student Loans Are Cheap Money
Federal Student Loans Are Cheap MoneyWhen you take out federal student loans, the interest rate is pretty low. Far lower than most credit cards, at least.
The money’s plentiful, too. In fact, you can take out up to $45,000 in federal student loans for a four-year undergraduate program if you’re classified as independent (or if you’re a dependent and your parents can’t qualify for PLUS Loans).
What’s more, you can deduct from your taxes a portion of the interest you pay each year.
Sounds like a winner at first blush.
It’s tempting to use that money to pay off your car or credit cards.
But The Interest Is A Silent Killer
Once you complete your education, it’s time to start making payments on your student loans.
Though you’ve saved credit card finance charges while you were in school, your loans have been quietly accruing interest the whole time.
Subsidized loans have the benefit of the government paying the interest while you’re in school, but not the unsubsidized ones. Those loans accrue interest from the minute you cash the check, and the amount due once school’s done can be significant.
There’s No Way Out
Not that you’re expecting to file for bankruptcy, but if you run into financial problems you won’t be able to get out from under those student loans easily.
So long as those debts remain owed to the credit card companies, they can be wiped out in a Chapter 7 bankruptcy case.
Why swap out an easier solution for one that’s more difficult?
Don’t Fall For It
Yes, the money’s easy. The interest rate is low, the payments can go out to 25 years or more, and you can deduct the interest expenses.
Still, you’re more likely to be saddled with those student loans without a way out if you need it.
This is one good deal that’s too good to be true, I think.
Image credit: marcoPapale.com