The return of federal student loan payments this month has the potential to significantly impact your finances, particularly if you’re already struggling with credit card payments.
According to the Consumer Financial Protection Bureau, one in five student loan borrowers have risk factors that indicate they may struggle with resuming their student loan payments.
During the initial 12-month period from October 1 to September 30, 2024, the impact won’t be as severe. Missing student loan payments during this time won’t result in default or credit score drops. However, interest will continue to accumulate, making it more challenging to manage the growing debt. To mitigate this, make consistent payments during the next 12 months. This will save you more money over time and help you pay off your debt faster.
Here are some strategies to consider as you begin:
Revamp your budget
An updated budget provides clarity on how much money you have available for paying off your debts. Review your bank statements and credit card statements to identify opportunities to cut back or find cheaper alternatives.
Start by documenting where your money is going, advised Kristen Holt, CEO of the nonprofit credit counseling organization GreenPath. Prioritize essential expenses such as rent, utilities, and transportation, and work towards building an emergency fund of at least $500 to prevent further debt. Holt said, “Even if you’re only able to save $10 per paycheck, it may take time, but it’s still better than saving nothing.”
Next, decide whether you want to focus on paying off your student loan or credit card debt. Make all payments on time, but allocate more money towards your high-interest debt to make greater progress. Typically, credit cards have higher interest rates unless new terms are applied through an agreement or promotional offer.
Seek lower credit card interest rates
A credit score of 690 or higher can qualify you for low-interest offers. Consider applying for a balance transfer credit card, which allows you to transfer debt from another account at a lower interest rate.
The ideal balance transfer card has no annual fee, a 0% introductory interest rate, and a balance transfer fee of 3% or lower. If the fee is lower than the projected interest payments on your current debt, the savings will accumulate and can be applied towards your student loan payments.
If you have multiple credit card balances, you may want to consider a personal loan that consolidates your debts into a single payment with a low-interest rate.
If circumstances beyond your control, such as an emergency or job loss, are affecting your ability to make payments, contact your credit card issuer and inquire about hardship plans. These plans may temporarily lower your interest rate and waive fees for a specific period.
Consider an income-driven repayment plan
An income-driven repayment plan bases your monthly payments on your income and family size. Federal student loans are forgiven after 20 or 25 years of payments. There are currently four income-driven repayment plans to choose from, depending on your goals and loan type.
When it comes to student loans, the decision to pay them off quickly to minimize interest or pay as little as possible to take advantage of forgiveness plans depends on your individual circumstances. Renée Earwood, an accredited financial counselor and student loan coach, suggests evaluating your options and considering a different income-driven repayment plan if it aligns with your goals. For example, the government’s new SAVE plan may be advantageous for those with undergraduate loans, as it could halve their payments starting in July 2024 and expedite the forgiveness of any remaining debt if the principal balance is smaller.
Consider credit counseling
If you’re feeling overwhelmed with debt and can’t see a way forward, nonprofit credit counseling organizations can provide assistance. Credit counselors can evaluate your financial situation, create a budget, and determine eligibility for a debt management plan.
In addition to consolidating credit card balances into a single payment with a lower interest rate, credit counselors who specialize in student loans can help you identify the ideal repayment plan.
“We’re going to look at the person’s whole situation,” said Holt. “We assess their credit report, which doesn’t impact their credit score but gives us a comprehensive view of their financial picture.”
Take a break from credit card spending
After reducing the cost of your debts, refrain from making new purchases on your credit cards. Consider temporarily switching to a debit card or using cash to stay on track with your financial goals.
Your credit card won’t be closed by the issuer due to inactivity as long as you have a balance and are making payments. Once you’ve paid off the balance, keep the card open and active by making small recurring purchases.
This article was written by Lambarena for the personal finance site NerdWallet. The Associated Press distributed this article.
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