Help a Reader: Funding College

Here's a question I recently received from a reader:

Should I take a new Stafford Loan for school, or just put it on a credit card?

• CC rate is 5.9%
• Student Loan is 6.8%

Each 6 month term will be around 3k.  I'm looking at 4 terms to finish.

The tax benefits of the Student Loan are interesting, but I'm not sure how great they will really be.

What would you suggest?

Comments

[savvy]

I would go with the student loan because of the flexibility it offers. A CC would need to be paid back immediately whereas student loan payments don't come due until 6 months after graduation. Also, the reader could make payments starting now if they so chose.

While the interest rates LOOK like a factor to consider, I wouldn't. Without getting into complex calculations (such as how often the interest accrues, spacing of the loans, etc.), the simple math shows that it's not much of an issue at all.

$12K @ 6.8% is $816/yr in interest. $12K @ 5.9% is $708/yr. You're only saving $108/yr by going with the credit card and that doesn't include any tax deductions (assuming the reader meets the income limits).

[AmandaD]

You get deferrment on your SL & can deduct the interest. Also, they will give you MUCH longer to repay the loan (depending on the final amount). Plus, you can consolidate your loans in the future if the rates drop.

[Kevin]

Is the student loan fixed? CC can usually (and without warning) raise your rates.

I would go with the Stafford, it probably looks better on your credit report anyway.

[ToughMoneyLove]

I would go with curtain number 3 - don't borrow money to go to college. There are alternatives. Are they on your list?

[Jim]

I'd go with the student loan.

If you qualify for the tax deduction then the student loan is better. If you don't qualify then your income will be high enough to pay off the loans quickly anyway so the interest rate won't make a huge difference.

You can get better repayment terms on Student loans and CC companies are less flexible and forgiving. The student loan is fixed rate and the CC may not be. Unless its an unsubsidized loan then the interest won't start accruing until after you graduate.

Jim

[cb]

You can't cover the $3,000 cost over the course of a six month term? That's only $500 a month. I assume you are working.

[Shan]

My #1 tip I give to college students is this: Don't go into debt for college. You're putting yourself at a serious disadvantage by starting your professional life owing money. Besides, $3,000 is affordable enough that you should be able to cash-flow it. And if you can't, then work for a semester, a year, or even two years until you CAN cash-flow it.

[Vanessa S]

I have been out of school for 3 years and make a good salary and so far all of my student loan interest that I have paid has been sent back to me in my tax refund. My student loan interest rate went down a percentage point when I signed up for automatic withdraw from my checking and will reduce by another 1 percent after I've paid on time for 3 years. You can get great deals when it's time to consolidate and you don't have to pay any off until 6 months after you graduate.

[Julia]

Go for the student loan... definitely. See if you can get by without borrowing the maximum every semester. Also once you're out of school, try to pay off your student loan as early as you can. (Assuming you did not rack up credit card debt. Just say no to credit card debt!!!)

[largebill]

I'll jump on the student loan bandwagon. Here is another reason. Depending on how the job market is and how competitive you are, some prospective employers will pay off student loans as part of the hiring bonus. None will offer to pay off your VISA card.

[tom]

Student Loan all the way. Banks are competing for your student loan business. They are offering percentage rate reductions, percentage of principal reduction, etc. Plus there are all the tax benefits and security of gov't funded loans.

[Bill Davis]

If you must borrow, the student loan is the way to go. Congress is mulling over lowering it, plus you could get a tax break. The downside of the CC is that your bank can change the terms at any time. The student loan rate is typically fixed. Get a federal student loan; don't rely on private companies.

The government isn't in this to make money. Student loans are one of the best deals around. And when rates drop (if they do), you may be offered a deal.

[Matt]

One alternative idea... how about going w/ a 0% interest credit card? If you have the ability to get a low 5.9% rate, perhaps it's possible to get the 0% card as well. Just a thought.

[TD]

Is it subsidized or unsubsidized? Definitely go with student loan if it is subsidized. Actually, just go with the student loan, you might have an option to consolidate it later at a much lower interest. So many more benefits, tax write off, deferment, etc.

[Rissa]

Student loan, student loan, student loan. Better treatment, in terms of the lender to lendee relationship. Looks better on credit - - it's obvious you were investing in your future v. on a CC where you might've just been buying a ton of flat screen TVs.

And the reimbursement is cash money you can use for other expenses (laptop, food, living, etc.) in a blanket term.

[Sam]

Go for student loan.

Not only is the interest rate a lot higher using CC, but it is also not fixed. So variations in market conditions may increase the interest rate charged and you will end up paying a lot more than you expected. Besides you cannot defer payment, you will have to begin to pay for your purchases the following month. And if you choose to pay the minimum you will end up accumulating debt which is a dangerous thing to do as the minimum will increase every month and you will end up being unable to pay your credit card balance.

Sam
Fix My Personal Finance

[Todd]

Go with the loan. First, you did not specify if it was a subsidized or unsubsidized. If it is subsidized, this is a no brainer. No interest accumulation until 6 months after graduation? Go for it.

Even if it is not subsidized, you will not owe until graduation and if rates drop at that point, it is very easy to consolidate federal loans at the rate. I consolidated after graduate school and my rate is 1.9%.

As to the reader who noted it is only $500 a month, why not work etc. I would advise that this advise NOT be followed. School is your job. You can always make money but if you get a D in a class because work and studies did not balance, you are stuck with the D. If, after a bit, you feel you have time to work without interfering with studies, go for it. But I know time can be a factor. I had a one credit class which had 8 hours of lab time a week, not including out of lab write ups, etc. It took so much time away from classes that were more GPA valuable but still time intensive like my 5 credit hour japanese class or my 4 credit calc II class. You are in school. Make it your job.

[Bad_Brad]

Take the student loan. Student loan pay-offs are extremely consumer friendly (i.e. if you can't make the payment for six months, there is little or no repercussion, the same is not true for a credit card payment). The student loan is also likely capped, whereas the credit card rate probably varies with Prime or LIBOR or something like that. Also, as others have pointed out, with a subsidized loan, you pay no interest until six months after you graduate. With the credit card, you will start accruing interest owed from day one of your freshman year. There's also a tax benefit (assuming you are not over a certain income after graduation) to the student loan interest, no such benefit with the credit card.

This is a no-brainer. Take the student loan.