I am on disability income but have not yet been able to get my student loans forgiven. If am unable to get them forgiven, can I take out a personal loan or put the amounts on my credit cards? Or should I try and work with a company that can help me reduce my bills so that they are more manageable? I have worked very hard to bring my credit score up and I would like to buy a house.
While it may make sense to take out a personal loan in order to consolidate student loan debts, it's probably not a good idea to pay your student loans with a credit card, and it may not even be possible. Many student loan companies will not allow you to make a payment with a credit card, and those that do may charge a transaction fee to cover the cost of credit card processing fees.
Even if you can use your credit cards, over the long term, it likely will be more expensive to pay your student loan debt with a credit card. That could delay your ability to buy a house.
Paying Student Loans with a Credit Card
When you make a student loan payment you are repaying both the principle amount and interest. If you pay student loan debt with a credit card, you are going to pay interest on the credit card balance each month, too. Essentially, you will pay interest twice — once for the student loan and then again for your credit card.
The only way to avoid paying credit card interest is to pay the balance in full. If you can do that, you would be better off just paying the student loan in full. Because you are on disability income, you likely would have to carry a balance from month to month.
When you carry a balance you will begin accruing interest on your credit card right away, which means your loans will cost you substantially more in the long run. You will also see your credit card balance increase quickly. As your balance increases, your utilization rate will also increase.
Your utilization rate, or balance-to-limit ratio, is the second most important factor in credit scores, right behind payment history. It is calculated by taking the sum of all your credit card balances and dividing them by the sum of all your credit card limits. A high utilization rate will have a negative effect on your credit scores.
Add up all of these issues, and it becomes clear that paying your student loans with your credit cards is probably not a good idea.
Student Loan Consolidation
A better choice might be student loan consolidation. With student loan consolidation, a lender repays all of your current student loans with a single, new loan. The new loan will generally have a lower or equal interest rate, but will be repaid over a longer period of time, perhaps as much as 15 years.
The longer repayment period results in lower monthly payments, making it easier for you to continue making them on time. Because your old student loans are reported as paid in full, they do not damage your credit history. Paying the new loan on time will help you preserve your good credit.
The downside is that the longer repayment period means you will probably pay more in interest over time, but doing so can help you protect your hard-earned credit score. Contact your student loan providers to find out if you qualify.
Contact Your Lender to Discuss Your Options
It is always better to communicate with your lender and let them know you are having trouble making payments before you fall behind. If you haven't already, you should contact your student loan company to discuss your repayment options. They may be able to help you come up with a solution to help you manage repayment.
Credit Counseling and Debt Settlement
You mentioned working with a company who can help you reduce your bills. There are two types of organizations that can help you do this: credit counseling agencies and debt settlement firms. Before choosing a company to work with, you should know the difference and understand the services each offers.
A credit counseling organization can help you by providing you with the tools and education to improve your financial situation. They may be able to help you manage your debts by reducing expenses and establishing a realistic budget. In some cases, they may also be able to negotiate with your creditors to obtain a lower interest rate or lower monthly payments on your accounts.
Debt settlement companies, on the other hand, only negotiate reduced repayment with your lender. Because you do not repay the full amount owed, a status of "settled" will be shown on your credit report for each account. A "settled" status will hurt your credit scores. In addition, some debt settlement plans require you to become delinquent on your accounts before qualifying for the program. Doing so will further damage your credit scores.
You should also be aware that debt settlement firms often market themselves as "debt consolidation companies." However, they are very different from the student debt consolidation discussed earlier in this column. What they mean by consolidation is that you write one check to the settlement firm and they then distribute the amount among your lenders.
Deciding to Buy a Home
Home ownership is thought of as the American dream. But if you are not in a financial position to maintain the home, it can become a nightmare. Homeownership has many often overlooked costs in addition to your monthly mortgage payments. Things like taxes and home owner association dues are just a start. Unexpected costs like foundation repair, heating and air conditioning, new appliances or a new roof can be very costly. In addition to a down payment, you should have money set aside to use in the event of a major home repair.
Before deciding to take on another debt, especially one as substantial as a mortgage loan, make sure you are able to repay all your of your debts and have savings set aside to cover unforeseen costs. Until then, it might be best to delay that purchase.
The "Ask Experian" Team