Even in the absence of the federal pause on requiring student loan payments, it generally makes sense to prioritize credit card payoff. Average interest rates on cards are among the highest charged on all forms of debt.
Let your interest rates guide you when deciding in which order to pay down debt. That usually means sending any extra money toward credit card debt first, then personal loans, student loans, car loans and, lastly, your mortgage.
With the debt avalanche method, you order your debts by interest rate, with the highest interest rate first. You pay minimum payments on everything while attacking the debt with the highest interest rate. Once that debt is paid off, you move to the one with the next-highest interest rate . . .
The average student loan is nearly 4.1 times larger than the average credit card debt. Credit cards can often carry an interest rate of over 20%. Federal student loans usually have an interest rate below 10%. The typical monthly payment on a student loan is between $200 and $299.
1. You might have little to no savings. If you're putting all your extra cash toward your student loans, you miss out on setting that money aside to build a savings fund. Having an emergency fund is crucial because life happens — as do sudden bills, repairs, and expenses — when you least expect it.
There are many benefits to paying off your student debt early. You will save on student loan interest and get out of debt faster while improving your debt-to-income (DTI) ratio. With a higher DTI ratio and more disposable income, you could pursue other financial goals, such as buying a house or saving for retirement.
It Could Change Your Credit Mix
If you have both revolving credit (like credit cards) and an installment loan (like a student loan), paying off your student loans will shift your credit mix. This could negatively impact your FICO score.
What is considered a lot of student loan debt? A lot of student loan debt is more than you can afford to repay after graduation. For many this means having more than $70,000 – $100,000 of total student debt.
Millions of Americans are affected by the burden of student loan debt. In the United States, student loan debt is nearing $2 trillion, and Californians carry approximately $150 billion of the debt. Student loan debt is now the second highest consumer market after mortgages.
Key Takeaways. Carrying student debt can affect your ability to buy a home if your debt-to-income ratio is too high. If you have too much student loan debt, you won't be able to save as much for retirement. Student loan debt can lower your credit score, especially if you fail to make on-time payments.
When prioritizing paying off your debt, start with the balance that has the higher interest rate (likely your credit cards) and go from there. No matter what type of debt you'll be dealing with, though, the most important factor is that you pay your bills on time.
There's a good reason to pay off your highest interest debt first — it's the debt costing you the most. Credit cards with higher-than-average APRs can be especially hard to pay off.
If you're close to maxing out your credit cards, your credit score could jump 10 points or more when you pay off credit card balances completely. If you haven't used most of your available credit, you might only gain a few points when you pay off credit card debt.
Student Loan Debt Statistics in 2023
Student loan debt totals $1.74 trillion and is held by about 43.5 million Americans, with the average monthly payment amounting to $337.
Interest can make student loans more expensive, while inflation can make that debt harder to manage alongside other bills. Paying off some of your debt during your studies could ease the burden later on and save you money on interest.
The average federal student loan payment is about $302 for bachelor's and $208 for associate degree-completers. The average monthly repayment for master's degree-holders is about $688.
If those monthly payments look low compared to what most borrowers pay, it's because most borrowers carry a lot more than $20,000 in student loan debt. As of March 2023, the average federal student loan debt in the United States was about $37,720, according to a BestColleges analysis of Education Department data.
Just because the average student graduates with nearly $40,000 worth of student loans to repay, it doesn't mean you have to choose between college or debt. There are ways to minimize the cost of college, and the amount you need to take out in loans, such as: Save up for college during a gap year.
The average student loan debt amount is slightly over $30,000. However, many borrowers owe $50,000 or more in student loan debt. This isn't impossible to overcome using the right repayment methods.
To reach an 800 credit score, you'll want to demonstrate on-time bill payments, have a healthy mix of credit (meaning accounts other than just credit cards), use a small percentage of your available credit, and limit new credit inquiries.
Paying off debt might lower your credit scores if removing the debt affects certain factors such as your credit mix, the length of your credit history or your credit utilization ratio.