Student loan debt and credit card debt. While separately tough to swallow, for many of us the two combine to form a Voltron sized burden — a burden that makes getting ahead seem like a pipe dream.
When I finally decided to create a budget, I found these two rows particularly concerning. I decided that the set and forget method would no longer work for us, and found that the harsh reality was we were on track to be paying $792/month for 20 years to take care of our consolidated student loan obligations. Plus we had minimum credit card payments totaling more than $620/month.
When I finally decided to face the music I looked hard at this combined mountain of debt, and the first striking thing I noticed was that my interest rate on the credit cards was a lot higher than the rate on our loans. I decided to attack the credit cards first. After scouring all of our budget items looking to squeeze extra money to pay down the credit card balances, I recalled once reading about different repayment plans for student loans. By default, we were placed on the level repayment plan, but I had to wonder if there might be a better plan out there that would align with our current credit card annihilating goals. So I logged into our account and found this promising table:
Notice that the initial monthly payment is significantly less for Graduated. Indeed, the payment does graduate up incrementally every couple of years until it finally reaches its high point, but for someone who was on ground zero on their debt repayment plan, this was exactly what I needed.
By converting from a level repayment plan to a graduated repayment plan we immediately freed up $147/month (18.6%)
I immediately allocated that $147 towards paying down our credit card balances. Robbing Peter to pay Paul? Yes, but Paul charges a much higher interest rate. And I felt more than comfortable leveraging my student loan debt to pay down our credit card debt. If you favor the debt avalanche method, then this may be right up your alley.
Specifically, if you meet the following criteria, then today might be your lucky day:
- an outstanding balance on your federal student loan(s)
- have credit card debt, or other high interest revolving debt, with an interest rate greater than that found with your student loan
- you are still on the level repayment plan for your student loans
A note: I have found that there are varying definitions regarding exactly how graduate repayment plans work. For example, some increment up every two years, some every four years. It might be best to simply call you student loan administrator directly to find out how your own plan might work. They can give you precise figures too.