The federal student loan payment pause that commenced in March 2020 is coming to an end. As of September 1, 2023, these loans have begun accruing interest again, and borrowers will resume making payments in October. However, this transition coincides with a challenging period for many Americans’ financial well-being, as credit card debt has reached a record high, totaling $1 trillion, according to the Federal Reserve Bank of New York. This article delves into the complexities of this situation and provides guidance on managing different types of debt effectively.
Credit Card Debt Challenges
Credit card debt can be particularly detrimental to your financial stability due to its high and compounding interest rates. As financial constraints increase, consolidating your credit card debt under a zero- or low-interest financial product can be a wise move.
Increased Debt for Student Loan Borrowers
With no student loan payments required over the past three-plus years, borrowers have had the flexibility to take on various other forms of debt. Surprisingly, more than half of all federal student loan borrowers obtained new bank-issued credit cards during the pandemic. Additionally, 36% acquired auto loans, and 31% signed up for retail credit cards, according to a July TransUnion study.
Liz Pagel, senior vice president of consumer lending for TransUnion, points out that while some debt accumulation was a natural outcome as young consumers matured and took on new credit responsibilities, the surge in new credit issuance reached unprecedented levels even before the COVID-19 pandemic.
“Lenders made up for lost time, and then some,” Pagel says. “There was just a lot of adding to credit, and consumers with student loans in forbearance were not immune from that.”
It’s not just the introduction of new types of debt; there’s also an increase in overall debt. Borrowers with student loans are now facing 24% higher median payments on other debt obligations compared to pre-pandemic levels, as reported by the Consumer Financial Protection Bureau in June. For younger borrowers aged 18 to 29, median payments have surged by a staggering 252%.
The Biden administration has introduced a 12-month “on-ramp” to ease the transition. During this period, missed federal student loan payments will not be reported to the credit bureaus, and borrowers won’t face default. However, it’s important to note that loans will still accrue interest, so paying if possible is advisable.
Prioritizing Credit Card Debt
While it’s crucial to make progress in paying down all debts, repaying credit card debt should be a top priority. Rosario Chacon, a certified financial planner and certified student loan professional in Oakland, California, emphasizes this point, stating, “If worse comes to worst with the federal system, you can ask for forbearance. But with credit cards, there’s no forbearance to protect you.”
Tricia Kollath, a certified financial planner and certified student loan professional in Gulfport, Mississippi, agrees, noting, “Credit cards are so much less flexible than the federal student loan system. You can’t call your credit card company and say, ‘Oh, I can’t make my payment this month.’ They’ll take you to court.”
Both Chacon and Kollath recommend a swift evaluation of your budget to determine how to continue paying down credit card debt as student loan payments resume.
One viable option is consolidating your credit card balances under a 0% balance-transfer card or a debt consolidation loan. These options can save you money on interest and free up additional funds.
A 0% balance-transfer card enables you to transfer your credit card balances to the new card and pay off the debt at zero interest during a promotional period, often lasting 18 months or more. However, these cards are typically available to borrowers with good or excellent credit scores, generally above 689.
Fixed-rate debt consolidation loans, on the other hand, are accessible to borrowers across the credit spectrum, available at banks, credit unions, and online lenders. As long as you qualify for a rate lower than that on your credit cards, you’ll reduce your interest costs.
Alternative Strategies to Tackle Credit Card Debt
If consolidation isn’t a feasible option, you can explore popular DIY strategies like the snowball or avalanche methods.
With the snowball strategy, you pay off your smallest debt first and then work your way up, using newly available funds to tackle larger debts. This approach can create momentum as the amount you allocate to each debt increases.
The avalanche strategy involves paying off the debt with the highest interest rate first and then proceeding to lower-interest debts. By doing so, you capitalize on interest savings to expedite your debt repayment.
Both methods provide clear strategies for addressing credit card debt, helping you maintain a sense of purpose and relief as you witness your financial burdens gradually diminish.
In summary, as the federal student loan payment pause concludes, borrowers must navigate their financial landscape carefully. Prioritizing credit card debt repayment, exploring consolidation options, and utilizing effective strategies can help individuals regain control of their financial well-being.