Many New York bankruptcy debtors owe both credit-card debt and student-loan debt, so debtors in similar circumstances might want to know if it’s better to pay down one rather than the other to avoid bankruptcy. It’s an especially important question because of the challenge in discharging student-loan debt. Maybe it’s better to focus on that instead? The quick answer is to focus on the credit-card debt, but there are many reasons, so read on.
- Interest rates between credit-card debt and student-loan debt vary—in favor of the student-loan debt. Interest rates on federal student loans, which are the kind that most people who have education debt actually owe, are much more reasonable than credit-card interest rates. The difference can be as much as 10 percent. Even though debtors amass student-loans more quickly, lower interest rates make them more manageable.
- (Federal) student loans have more repayment options. Most federal student loans permit borrowers to choose income-driven repayment (IDR) plans. These plans usually cap monthly repayment levels at around 10 to 15 percent of debtors’ incomes. This can be quite advantageous to debtors who are unemployed or are working in low-paying jobs. Lastly, debtors who are on IDR plans long enough can receive loan forgiveness from the federal government.
- Student loans usually have more deferment options. They probably aren’t used as frequently now that IDR plans have come along, but student loans, including many from private lenders, come with better deferment and forbearance options than credit-card debt. These options can often enable debtors to suspend their monthly payments for a year, but interest will continue to accrue.
- Student-loan interest payments are tax deductible. Congress nearly stripped this option in one of its tax bills last year, but it saved it. Debtors can deduct their education-loan interest payments from their income taxes, which can mean significant savings over long periods of time. Credit-card debts don’t allow this.
There are a few methods to repaying debts, though researchers disagree over debt-management strategies, but over the course of months or years, paying down credit-card debt is usually going to be a better way to avoiding bankruptcy than going after the student loans.
Before closing I should add that debtors should not borrow money on their credit cards to pay down student loans before filing bankruptcy. Trustees will consider these payments preferences that can be avoided, leaving debtors with costlier bankruptcies and just as much student-loan debt.
If debt management strategies aren’t getting you out of your financial problems, then talking to an experienced New York bankruptcy lawyer can help you assess your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy attorney Brooklyn NY Bruce Weiner for a free initial consultation.
