Setting payment priorities for cards, co-signed student loans
Dear Credit Wise,
Which should we pay off first -- our own credit card debt or the student loans we co-signed for our children? -- Kim
Dear Kim,
The answer to your question lies in what kind of interest rates are attached to your credit cards and to the student loans. The way you have phrased your question makes me think you are leaning toward focusing on your credit card debt. That may be the best course, but there are some questions you will need to answer first.
I do want to say that you are correct in calling your credit card debt "your own," while the student loan debt is something you co-signed for your children. However, the very nature of co-signing means you have taken on the responsibility of paying the debt off if your children are unable to do so. So while it may be "their" debt, it is also ultimately yours. Anyone who co-signs for any type of loan should understand that very clearly. Never co-sign for anyone, for any reason, unless you are prepared to take on the responsibility for paying off the loan.
Now, to the question of which to pay off first. As I said, much depends on your interest rates. If you are dealing with APRs in the double digits, chances are you are not making much headway in paying off those cards unless you are making far more than the minimum payments required by your creditors.
Since it sounds like we are talking about more than one card, I would suggest that you sit down and figure out exactly where you are with these cards. A great place to start is with your statements. You will notice a handy little box that lays out where you are in very easy-to-understand terms. Assuming that you make no additional charges to the card, it will show how long it will take you to pay off the card making only the minimum payment and how much you will end up paying. The next line will show an amount that is more than the minimum payment and how long it will take to pay off the card and how much you will pay. Finally, there will be a "Savings =" amount to show what you will save if you pay the higher amount each month.
This is very useful information as you begin the process of paying off your card debt. There are several ways to go about paying it off. You will save the most if you pay off your highest interest rate cards first, especially if they have higher balances. Some people target their lowest balance cards so they can quickly begin to see results. No matter which method you choose, you should determine how much you can pay monthly toward your debt and continue to pay that total amount each month. As cards are paid off, you can take advantage of the "snowball method," and put the money you were paying to the paid-off card to your next targeted card.
Student loan debt is a different animal from credit card debt, and believe me, your family is not alone here. I don't know if the loans you co-signed are federal loans or private loans. There are several options for repaying federal loans that are not available for private loans. Both loans, however, will likely have a long pay-out time. If your loans are mainly federal, the options available range from no payments whatsoever for a time, to consolidated payments and even total loan forgiveness if you qualify. Student loans can be quite complicated to decipher, and I suggest you review your options thoroughly at StudentLoans.gov or StudentLoanCounselors.org for additional help.
I would also suggest a frank talk with your children. You may be reluctant to share your entire financial situation with them, but you have put yourself and your financial future on the line by co-signing for their education. One or both of you will need to be sure that the payments are being made while you are focused on retiring your credit card debt. Once that is done, you should sit down again with your family and decide how you want to aggressively address the remaining student loan debt.
Be wise with your credit!
See related: Mom's on the hook for co-signed student loans