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Students May Be Tempted to Use Credit Cards for Education Expenses

Francine L. Huff
LoanBiz Columnist

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The credit crisis has made it difficult for some people to obtain student loans. As a result, students consider relying on credit cards to pay their education costs. However, there are drawbacks to using student credit cards to pay for books and other expenses.

Private Student Loans Are Tough to Get

About 39% of U.S. families pay for college without borrowing money, according to a survey by SallieMae and Gallup. However, nearly half of families do rely on borrowing funds, specifically federal and private student loans. But with about 170 private lenders dropping out of the student loan market since the beginning of the year, it's gotten tougher to find loans and people may be tempted to use plastic to pay for expenses.

Digging a Debt Hole

Students who use credit cards to pay for a lot of their education expenses may be setting themselves up for years of debt worries. Student loans have lower interest rates than most credit cards, so they're a better deal in the long run.  Furthermore, being late with credit card payments could send interest rates soaring as high as 36%. While getting a higher education is important, paying for it with the wrong loan product can be a huge mistake.

Credit Rating May Suffer

Lenders don't like to see a lot of open lines of credit with huge balances. Students who borrow too much on credit cards may leave college with a poor credit rating, which could make it difficult for them to get a financial toehold. Having a poor credit score can affect everything from renting an apartment to buying a vehicle to getting a job.

Other Funding Sources

So what should people do if student loans aren't enough to pay their bills? Some families have decided to tap their home equity to pay for tuition and fees. However, this is something that should be done with caution since the family home will be used as collateral. Other people have chosen to cash in investment accounts. But using retirement funds should be avoided, especially if parents don't have many years before they plan to stop working.

Think twice before charging education expenses to student credit cards. While a card can be useful for small purchases, it's best to pay it off each month to avoid racking up a load of debt before graduating.

Sources:
  • Business First
  • "Housing market troubles spilling into college financial aid offices," by Dennis Law, www.columbus.bizjournals.com.
  • SallieMae
  • "How America Pays for College," by SallieMae and Gallup,www.salliemae.com.

About the Author
Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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