Research conducted by student https://loansbear.com/cash-loans-in-st-charles-md-20603/ 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.
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?
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.
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.