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Peer review: Paying down credit card, student debt

Last update: December 7, 2006 - 5:33 PM

Q My husband and I wonder whether we could pay off our separate school loans (the interest rate has gone up on them for both of us) and our credit card debt by using a lower-interest, fixed-rate loan to consolidate these various debts. Alternatively, would a home equity line of credit be appropriate? We're looking for a way to decrease the interest rate and term to pay off these debts more quickly and with less money overall.

M.G., MINNEAPOLIS

A Paying off your school loans is a different decision than paying off your credit card debt. Let's look at the credit cards first. Will you make a promise to yourselves that you will not run up your credit card debt again? If the answer is yes, than it's OK to use a "one-time fix" home equity loan to pay it off.

A home equity loan would be better than a line of credit because you will have a set term and a fixed rate. The interest is also tax-deductible up to $100,000, making the effective rate you pay lower when you figure in the tax deduction.

Contemplate the reasons you ran up the credit card balance in the first place. If the cause was careless spending, you'll want to commit yourself to learning to live within your means.

For the student loans, keep the interest tax-deductible by consolidating them at a low fixed rate with a student loan consolidation program. The rate will be lower than what you would get with your home equity, and $2,500 worth of interest per year on these loans is completely tax-deductible for couples whose modified adjusted gross income is less than $100,000.

Comparison-shop. Some school loan lenders give additional rate cuts for borrowers who sign up for auto-pay or who make a certain number of payments on time.

KRISTA J. ZACHMAN, CFP (33)