In the vast area of financial battles, all eyes remain fixated on the impending Supreme Court ruling that will determine the fate of President Joe Biden’s ambitious student debt forgiveness plan. Yet, amidst the frenzied anticipation, it’s crucial not to overlook the lesser-known but ever-present adversary: credit card debt. Much like a tempestuous tide, the numbers fluctuate, but the weight of this burden continues to haunt countless Americans.
Experian recently revealed that the average credit card balance for Americans reached a new high in 2022, standing at $5,190. This debt burden differs among generations, with millennials carrying an average balance of $5,649, while Generation X faces a more substantial burden with an average balance of $8,134. This highlights the challenges faced by individuals grappling with credit card debt in their financial journeys.
According to Experian’s State of the Automotive Finance Market report in Q4 of 2022, car loans have seen a significant increase in recent years. The average loan amount for a new car reached $41,445 in the last quarter of the year, resulting in an average monthly payment of $716 over a period of approximately 69.44 months. Used cars also experienced a similar trend, with an average loan amount of $27,768 and an average monthly payment of $526 for around 68.01 months. These figures indicate the growing financial commitment associated with car loans.
In addition to various types of debts like mortgages, personal loans, and debts owed to family and friends, student loans also play a significant role. It raises the question of how student loan debt should be approached in comparison to other forms of debt.
Experts generally advise treating student loans differently from other debts, regardless of the outcome of Biden’s student loan forgiveness plan, even if it faces potential obstacles from the Supreme Court. Taking a less urgent approach to student loan debt can actually be beneficial, and here are several compelling reasons why.
Make Credit Card Your Priority
According to Cimalie Zoy, the Director of Financial Planning at Edelman Financial Engines, debt can be classified as either destructive or constructive. She asserts that credit card debt is often categorized as “destructive” debt.
Zoy advises that credit card debt, being one of the costliest forms of debt, should be prioritized for early repayment. She suggests focusing on paying off credit cards before considering tackling student loan debt.
The data speaks for itself – based on recent statistics from the Board of Governors of the Federal Reserve System, the average interest rate for credit card accounts was recorded at 20.92% as of February 2023. In contrast, the average interest rate for 24-month personal loans stood at 11.48%, and for a 60-month car loan, it was 7.48%.
Federal student loans have fixed interest rates determined by the year of borrowing and are significantly lower than the current average rates for credit cards, which are variable.
If you find yourself dealing with high-interest credit card debt close to the average rates, it is advisable to explore options for faster debt repayment, such as debt consolidation or utilizing a balance transfer credit card. These alternatives can help you manage and reduce your debt more effectively.
Multiple Repayment Plan Options
Although it is important to prioritize paying off credit card debt promptly, there is a valid perspective in favor of an extended repayment period of up to 25 or even 30 years for federal student loans. Joseph Carpenito, a financial advisor of Materesky Financial Group, highlights that borrowers currently have access to various income-driven repayment plans.
These plans enable borrowers to make lower monthly payments based on their income for a period of 20 to 25 years.
Carpenito acknowledges that while income-driven repayment programs may provide the advantage of lower or even zero monthly payments, they can result in higher total interest paid throughout the loan’s lifespan. However, it is worth noting that contemporary income-driven plans also offer the benefit of forgiving any remaining loan balance at the conclusion of the repayment term.
If you decide to pursue this route, it’s crucial to be aware of the potential tax implications associated with student loan debt, commonly referred to “student loan debt tax bomb.” Although it is currently on hold, there is a possibility that it may resume in 2026.
Furthermore, if income-driven repayment is not your preferred choice, there are alternative options available. Federal Consolidation Loans can be repaid over a maximum period of 30 years, and there is also the option of an extended repayment plan for federal student loans, which allows for repayment over a span of up to 25 years.
Deferment and Forbearance
Unlike credit card debt, auto loans, and other debts that may lack leniency during financial hardships, federal student loans offer deferment and forbearance options that provide temporary relief.
These options allow borrowers to temporarily suspend or reduce their monthly loan payments while they regain financial stability. The US Department of Education highlights that loan forbearance, in particular, enables borrowers to pause or reduce their monthly payments for a maximum duration of 12 months.
Debt Forgiveness Plans
Public Service Loan Forgiveness (PSLF) is a well-known program that offers debt forgiveness to borrowers working in eligible public service roles. After making payments on an income-driven repayment plan for ten years (120 months), qualifying individuals can have their remaining student loan debts forgiven.
However, it’s important to note that there are various other student loan debt forgiveness programs available based on factors such as military service, specific professions, or the industry in which one is employed. These additional programs provide additional avenues for debt relief based on specific circumstances.
Many individuals are unaware of the abundance of state-based student loan forgiveness plans that exist, some of which do not require a specific work commitment for eligibility. It is worth noting that the options for credit card debts or auto loan debt forgiveness are significantly limited, often only available through filing for bankruptcy.
Tax-Deductible Student Loan Interest
Unlike other debts, federal student loans offer a potential advantage when it comes to tax benefits. Danny Cieniewics, a financial advisor at Hyperion Financial, explains that interest charges on direct loans can be tax-deductible, although there are income limitations to consider.
In 2023, individuals filing as single and earning below $75,000 or married couples filing jointly with an income below $150,000 may be eligible to deduct up to $2,500 in student loan interest. This deduction applies specifically to borrowers who meet the specified income criteria.
Summing it up, it is advisable to approach student loan debt differently from other forms of debt. While uncertainties surrounding student loan forgiveness plans and potential tax implications exist, focusing on paying off high-interest debts such as credit cards should take priority. Other debts should be managed with urgency, making at least the minimum payments on student loans.
By addressing immediate financial obligations and working towards reducing high-cost debts, individuals can gain greater financial flexibility and make informed decisions regarding their student loan repayment strategies.
Remember to assess your specific circumstances, explore available repayment options, and seek guidance from financial professionals to create a tailored plan that aligns with your financial goals!