The 411 on student loans

Over the last decade, student-loan debt has super-sized from $41 billion to $87 billion. Even though student loans can be an important investment for your future, you have to go in the loan game fully educated (pun intended!). $86.7 billion outstanding student loans in 2008 (source: collegeboard.com). Whoa!

Plusses:

  • Earn an average of 60% more with a bachelor’s degree than with only a high school diploma. Cha-ching!
  • Federal student loans generally have lower interest rates than private loans. Choose subsidized loans if you qualify because the government pays the interest on those loans while you’re in school. Total bonus.
  • Both the Hope and Lifetime Learning tax breaks allow income tax credits of up to $1,800 or $2,000 respectively for tuition and fees. Also, up to $2,500 can be deducted from taxes for interest payments on qualified student loans. Check out IRS Publication 970 at irs.gov for more info.

Minuses:

  • Sorry, there’s no guarantee you’ll find a degree-related job (especially in a tough economy), which could mean a lot of wasted money.
  • Spending borrowed money on a degree without an idea of what you want to use it for isn’t cost effective. This could result in missed opportunities to take relevant classes or extra terms or years spent in school. Get a plan before taking pottery 101.
  • If you don’t qualify for federal loans, private loans are an option. They usually have significantly higher interest rates, which cut into the cost-effectiveness of your degree.

The 411 on credit cards

Yeah, we’ve heard it all before: credit cards are evil. They encourage impulse buying, have high interest rates and often shoulder the blame for piles of debt. All this can be true. But credit cards serve a purpose and can offer great benefits.

Plusses:

  • Using a credit card, then paying off the balance on time helps build good credit, something you’ll need to get a loan in the future.
  • If you need a product (like a computer for school) immediately but don’t have the cash on hand, use a card to buy it. Pay it off quickly; otherwise, interest will accumulate, making the purchase more costly than it needs to be.
  • If your card is lost or stolen your liability is limited to $50 when the loss/theft is reported to your financial institution within two business days. If the loss or theft is reported after two business days then the liability cap is raised to $500.
  • If an unauthorized transaction appears on your periodic statement you have 60 days to report the discrepancy.
  • Some cards offer theft and accidental-damage insurance, and many give free extended warranties on products purchased with the card.
  • Earn free travel, cash-back rewards or other perks with various credit cards.

Minuses:

  • Credit cards have one of the highest interest rates of any type of consumer loan; the average APR (annual percentage rate) was 13.54% in 2008. Late payments can quickly damage your credit score and lead to higher interest rates. Plus, you’ll have late fees and interest to pay. This can lengthen the time it takes to pay off the balance.
  • The fine print can include all kinds of tricks, such as changing interest rate, intro rates that jump to outrageous heights or harsh Universal Default Clauses. The Credit Card Accountability, Responsibility and Disclosure (CARD) Act will likely end universal default clauses, limit interest rate changes and require terms to be more clearly explained. This law was implemented in February 2010 and phase three went into effect August 22, 2010.
  • Service and over-limit fees can kill your monetary buzz.
  • It’s easy to get carried away with spending when money isn’t directly coming out of your account.