Which makes more sense to pay off? CC debt vs federal student loan

**disneysteve** · 08-03-2009, 02:38 PM

Interesting situation. Normally, I'd say pay the higher rate debt first. However, in your case, paying the lower interest rate first saves you an immediate $20,000. Without running the numbers, I'd have to say that you're not going to save $20,000 in interest by paying off the CC first.

So I say take the 20K savings and get rid of the student loan. Then, be sure and put every spare penny toward the CC. Don't just pay the minimum and look for possibilities to lower that rate by transferring the debt to another card. Without the student loan debt, you may qualify for something better.

**kork13** · 08-03-2009, 03:51 PM

....just make sure to get that offer in writing. However, I agree with DS, it could potentially really help you out. I wonder, however, what such an action will look like on your credit. However, $20k is $20k, and in this case, any potential damage to your credit may be reasonably worth it.... But yes, interesting scenario.

**disneysteve** · 08-03-2009, 05:38 PM

I was wondering what happens with the 20K they are forgiving. That must show up somewhere. It could be taxable, which would change the calculation. It could mess with your credit score. You need to find out the details before you decide for sure what to do.

**poundwise** · 08-03-2009, 05:46 PM

Ordinarily, I'd very quickly say the credit card should be your target:

1) It is a credit card, revolving debt that has terms that can change
2) It is higher interest
3) It is Bank of America

However, paying $30K to eliminate $50K in debt is an amazing opportunity. I would absolutely do that instead and then get cracking on that credit card balance.

Even if the reduction/forgiveness ends up being taxable, it is still far and away worth it.

I would do as the earlier poster suggested and get these terms in writing and the payment accepted as payment in full.

**anonymous_saver** · 08-03-2009, 07:25 PM

(1) Stop using the credit card. Put it in ice in the freezer. Seriously. Like now.

(2) Contribute up to the match in your employers retirement plan.

(3) Do you have an emergency fund, a mortgage, a down payment fund? It concerns me that if you pay either of these off that you would have no emergency fund and then if you get into another emergency then you'd use your card again.

(4) I would get all of the details of this student loan deal. It sounds too good to be true. If your FICO score will likely lower by 100 pts. for example, then if you want to buy a house in the relatively near future than the 20k savings may not be worth it.

(5) Perhaps you could let us know your take home pay and your monthly bills to help us give you more specific advice.

**Seeker** · 08-03-2009, 11:41 PM

Ummm, when exactly did you leave college?

10 years for a Federal Student Loan happens to be the statute of limitations for repayment.

Unless "forebearance" changes these limits.

Do you have any documents on the forbearance agreement?

Do you know how much money "exactly" was loaned to you all those years ago?

**CitznFish** · 08-04-2009, 07:13 AM

Thanks for all the information guys!

I do have the offer to pay off the student loan in writing. I wrote them a letter 6 months ago asking if we could make a deal to just pay off part of the loan and call it even. They responded 6 months later with a letter stating I could pay off my 50K loan for just the balance owed and the interest would be forgiven. That balance was 32K minus some payments I had made, so that came to 30,400 or so.

I was stupid and just let my SL go into forebearance for 10 years. i always thought I would go back to school to get my MBA and since I had the opportunity to not pay the loan back i went that route. Very dumb on my part.

As for the CC debt, I never use my CCs. I only used this one to pay for relandscaping my house. I had some money saved up and thought I would put it in teh stock market and charge the relandscaping project to my CC with a 0% interest for a year. Figured I could make a little money in teh stock market. unfortunately a month after i put the money in the market crashed and I lost the majority of that money. So that's why I have that CC debt. generally I just pay cash/debit card for everything.

Thanks again for the advice though! I'll move forward and pay off that student loan then try to figure out a better way to manage my finances.

**Seeker** · 08-04-2009, 02:20 PM

Cool deal.

I was so concerned that these people coming at you with this 20k reduction just sounded so unlike the Student Loan people, that I was concerned about whom was trying to collect your money.

Since you instigated this process with a letter to them, the above is definitely how you should follow through.

Coincidentally, EEinNJ wrote a thread about "Zombies" -- they are popping up more lately.

Saving Advice Forums

http://www.savingadvice.com/forums/debt/47800-beware-zombies.html

**wnlbutterfly** · 08-06-2009, 03:44 PM

Are you sure it wasn't default? Forbearance you usually have to fill out paperwork and it has a time limit on each forbearance. If you just stopped paying that is more likely default.

I didn't think there was a statute of limitation on student loans? And that is one debt that you can't get forgiven in bankruptcy court now. Used to be able to but they changed that couple years back.

Do be careful. We had gone through similar arrangements with student loans before and as soon as you aren't looking they sell it to someone else who doesn't have to honor the agreement you had. Let us know if this works out for you.

**creditcardfree** · 08-06-2009, 04:08 PM

I agree about paying off the student loan, however, please call them and find out if you will be receiving any tax documents on the remaining $20K. Find out the name of the document, too, so that you know how it will need to be recorded on your income taxes.

An additional $20K in income can really mess with your taxes depending on your situation. I'm not saying not to do it for this reason, but to make sure you have all the information ahead of time.

**Alex_Adviser** · 08-06-2009, 10:36 PM

Without any calculations and playing with numbers, I'd suggest to pay off the Federal Student Loan. You could save a lump-sum of $20000 by paying it off, which is a good offer. And also you would be one debt less by paying it off. Then you can contribute your major savings then to pay off your Credit card.

If you plan to pay off credit card first then remember that in no way you can save around $20000 in interest which you can save by paying the Federal Student loan.

**CitznFish** · 08-07-2009, 12:35 PM

Originally posted by wnlbutterfly View Post

Are you sure it wasn't default? Forbearance you usually have to fill out paperwork and it has a time limit on each forbearance. If you just stopped paying that is more likely default.

I didn't think there was a statute of limitation on student loans? And that is one debt that you can't get forgiven in bankruptcy court now. Used to be able to but they changed that couple years back.

Do be careful. We had gone through similar arrangements with student loans before and as soon as you aren't looking they sell it to someone else who doesn't have to honor the agreement you had. Let us know if this works out for you.

It def. was forebearance. i filled out the paperwork multiple times. I think it went into default 8 years ago but I got it out of default at that time.

**b4freedom** · 08-14-2009, 12:03 PM

Pay off the student loan. $20k is $20k.

**junosama** · 08-16-2009, 06:12 PM

I have a similar issue. My car debt is around 20k but my student loan is 30k, but my car costs me 500 a month and my loan is only like 250. So i am trying to pay off my truck ASAP cause it hits me for the most money per month. After i pay off my truck ill go after my school loan.

Which makes more sense to pay off? CC debt vs federal student loan