Student Loans or Credit card debt? which to payoff

[Beck]

My wife and I are trying to decide which debt to pay off first, either A) her two student loans (one $7,000 at 6.5% and another $2,700 at 5.5%) or B) our credit card debt ($8,000 at 18.9%, $5,200 at 23%, and $2,500 at 9.9% fixed).


We are both employed right now, and have about $1,000 per month to use towards paying debts, however my wife wants to quit work in about 1 year to have a baby and be a stay at home mom. If we diligently pay off debt, and if I get a decent raise this coming fall, we should be able to make budget adjustments to make it work - but we have to pay off debt.

I understand that conventional logic dictates that we should "always" pay off the credit card debt first because its higher interest rate.... and I know thats true. I just psychologically feel like I want to pay off the Student Loans first, because a) they will not be run back up again like credit cards can be and to a lesser extent because then b) I wouldnt feel like Im paying for an eduction that isnt being used for work.

We have managed to pay off some credit card debt in the past - usually things that have fixed credit repayment terms - and although in the last two years we have previously paid off around $13,000 in credit card debt from our wedding and other expenses - Im always disheartened when the credit card balance rises up again. I had paid the card that currently has $8,000 on it down to $3,000 before christmas, but then in the past 4 months it ballooned back up again. Same with the card with the $5,200 on it, we had only $1000 on it this time lastyear, but FOOLISHLY bought stuff we didnt NEED (both she and I were equally guilty) - and we ran that card back up to $5,200 - although none of these cards are maxed out - Im tired of feeling like im on THE DEBT TREADMILL - and I want to see some PROGRESS!

I have about $7,000 cash (sold an old car, plus some other savings) - and in my mind I want to take big BITE out of the debt. Right now - and for the past several weeks - Ive been feeling like I should aim at the Student loan debt - the $7,000 loan, then then $2,700 loan - because then by June we could have 100 $ of her Student Loans Completely paid off -- and since we are both done with our education we wouldnt run the debt back up again... THEN we could focus on the admittedly higher interest credit cards.

Im I crazy to think of paying off my debt in this way? I understand the math is against me, but it feels like the psychology is in my favor.

I welcome any thoughts or suggestions, thanks for your time.

[disneysteve]

1. Cut up the credit cards. If you can't use them responsibly, you shouldn't use them at all.
2. Attack the highest interest debt first. That would be the 23% card followed by the 18.9% card.

Most importantly, STOP LIVING BEYOND YOUR MEANS. You have got to stop spending money that you don't have. That's what you are doing when you use your credit card to buy something that you can't afford. You should never carry a balance on a credit card. It is fine to use one for convenience and pay the bill in full each month. My wife and I do that all the time. You, however, are using the card to get stuff you don't have the money for. You'll never get out of debt until you get on a budget and only spend what you have. Stop using debt to finance a lifestyle that your income can't support.

[Beck]

Thanks for the suggestion Steve, we hope to get where you are (paid off credit cards) someday soon.

For what its worth, although we havent physically cut up our cards yet, we have both put all but one credit card up in a locked box - and most of those cards physically expire this year - so we are working on stopping the debt hemmoraging.

I had a credit/debt "awakening" recently, about a month or so ago, and Im working to make substantial changes towards living on a lifestyle beyond our income. Whats most foolish, is that these past two years - we really probably had the overall income to not need to use credit cards - we were just using our combined incomes... to pay off other debts from before our marriage and to save up to buy our first house, which we did last year ... while foolishly using what was then "lower interest rate" cards to cover other expenses. Then interest rates get raised and we have some unexpected medical and auto expenses... next thing you know, it feels like we've gone no where in a whole year.

So I am willing to take the step of physically cutting up our credit cards - (which I have thought about before) - if thats really the best way. Ive thought about it seriously before, but never been able to quit it - I guess its sorta like 'planning to quit smoking sometime in the future'.

Im just wondering if you or other folks think there is any validity to the proposed "pay down certian student loan debt first" idea? My idea is that a) you cant (ordinarily) run your student loans back up once education is complete and that b) although the credit cards are not maxed out - they are fairly close to their limits, so the amount of damage that can be done is limited - provided that 1) we pay a little extra each month so that we arent being eaten alive by interest and 2) we cut up the cards.

So do folks think the "pay off debts that you only have to pay once" mindset has any value, or should all decisions always be based purely on interest rates and nothing else?.

Thanks again for everyone's comments, they are greatly appreciated.

[jpg7n16]

Im just wondering if you or other folks think there is any validity to the proposed "pay down certian student loan debt first" idea?

I've never really heard 'pay off student loans before CCs' ever advocated - except for the diehard low balance to high balance guys.

Student loans are typically one of the last on my debt payoff lists, because their interest is tax deductible (to a point). Meaning the real tax-adjsuted interest rate is that much lower.

So do folks think the "pay off debts that you only have to pay once" mindset has any value, or should all decisions always be based purely on interest rates and nothing else?

That will depend greatly on who you ask on these forums.

I agree with DS though, focus on the interest rate.


From my finance classes, the interest rate is the 'cost' of money. So the higher the interest rate, the higher the cost.

So then I'd ask, if you were looking to eliminate $1 of debt, would you rather eliminate the dollar that costs you 5 cents/year or 23 cents/year?

The one that costs 23 cents costs nearly 5 times as much as the other, so you get much more bang for your buck by getting rid of it. Multiply that effect by a couple hundred or thousand dollars (whatever your balance is), and you'd see that the CCs are terribly expensive by comparison! Therefore it only makes sense that you'd want to get rid of as many of those 23% dollars as you can - meaning pay them off first.

[disneysteve]

Beck, would you take out a loan today at 23% interest in order to get money to invest in something that will pay you a 5.5% return?

Surely, the answer to that question is no. You'd have to be insane to do so.

By holding onto a 23% credit card balance so that you can pay off a 5.5% student loan, that is essentially what you are doing.

The only possible argument, which I don't think applies here, for paying the student loans first is that student loan debt is not bankruptable. So even if you filed for bankruptcy, you'd still be stuck with the student loans. From what you've said, though, you aren't teetering on bankruptcy so that doesn't matter here.

[MonkeyMama]

I see no reason to keep 18% - 23% interest credit cards while paying down 5-7% student loan interest.

Agreed with the others.

[JoshuaHeckathorn]

Pay off the credit cards first, and don't use them again until you're ready to only buy what you can afford to pay off each and every month.

[Beck]

Im glad to hear all of these opinions, Even though these well reasoned views goes opposite of what my 'emotional' feelings about wanting to pay off student loan debt, its still good to hear them.

I completely agree with everyone that it is a slam dunk on the math for the interest rates. I was an average math student and only ever took an "intro to accounting class" my freshman year of college - and I believe you when you say that 23% interest is way more serious than 5.5%.

I figured that about 9 out of 10 folks on this website would recomend the "attack the high interest credit card debt" approach. I was just wondering if anyone had ever viewed it from the perspective of "at least I cant run my student loans back up again" ?

[disneysteve]

I was just wondering if anyone had ever viewed it from the perspective of "at least I cant run my student loans back up again" ?

Here's the problem. With that line of thinking, you are basically saying that you aren't done living beyond your means. You still consider running up your credit cards to be an option to do at some point. Until you decide once and for all to stop using debt to support a lifestyle you can't really afford, you are never going to fix this problem no matter what order you use to repay your current debts. If you pay off the student loans first and then the credit cards, you can still run up the credit cards again if you haven't fixed your spending problem. And you will have blown hundreds more in interest that way making it even worse.

[LuckyRobin]

I think the big problem here is that you want to use paying off the student loans as a crutch not to run your credit cards back up again. You're viewing having high balances on your cards as a failsafe mechanism. As long as those high balances are there you won't think about using those cards, but the minute they drop to lower levels, you're not sure you'll have the discipline not to run them up again. All you would be doing by paying off the student loans first would be delaying the problem. As soon as those credit card balances start to drop you will have to find a way not to use them again, whether that is now or six months from now or a year from now. If you don't change the mindset that got you into this problem it will still be there when the loans are paid off, no matter what psychological tricks you pull on yourself. The only way out is to not use those cards at all and pay them down.

[Eric80]

I think that you need to assess which one carries the most interest or the one that is of highest risk if you neglect it and then prioritise that. Or if you're really struggling to decide then maybe go and speak to the citizens advice bureau where they can offer sound advice and a possible route to help you resolve this.