Lisa Whitley — Quick question: If you are behind in paying your bills — your mortgage/rent, credit cards, student loan— which one do you worry about the most?
If you said, “mortgage/rent,” then you are in line with what most people similarly situated would say. And that makes perfect sense: you need a roof over your head and any threat to that is serious.
But what comes next?
Recently published academic research found that persons who are behind in making payments report that their overdue credit card causes them more worry than their delinquent student loan. The question is: “Should it?” Should you be more concerned about a late credit card payment than a late student loan payment?
Let’s explore the consequences.
If you are persistently late with your credit card payment, you will lose access to that line of credit. The account may very well be turned over to a debt collector and you could even be taken to court over the debt. But if you were to file for bankruptcy, this unsecured debt could be dismissed.
On the other hand, if you default on a federal student loan (by far, most outstanding student loans are federal), the possible consequences include garnishment of your salary (without going to court), capture of your tax refund and loss of other federal benefits. And if you file for bankruptcy, it is highly unlikely that the debt will be dismissed (whether federal or private).
So, clearly, the consequences of being severely behind in your student loan payment are greater than being behind on your credit card. And yet it is the overdue credit card that is keeping you up at night.
Here are a few reasons why that might be:
- Your expenses consistently outweigh your salary. You are relying on a credit card to fund your day to day expenses.
- You feel shame about your credit card balance in a way that you do not feel about your student loan. I don’t want you to feel shame at all. But yes, there seems to be more social acceptance of student loan debt than credit card debt.
- The outstanding balance on the student loan is much larger than the credit card. If you have simply accepted that it will never be paid off, it is easier to push it out of your mind.
So, what’s the bottom line? If you must make the hard choice between defaulting on a credit card account versus a student loan, the wiser choice is to prioritize the student loan payment. And know that there is a range of programs designed to help you stay out of federal student loan default. If your reason for elevating the credit card payment in the queue is that you are living off of credit, the task is harder. Until you break that cycle, you risk putting yourself in a far worse position with long lasting negative consequences.
These are not easy decisions to make, but you are not alone. At Your Money Line, we can help you think through your options and come up with a plan to get back on track.