Daily Aid 112: Comparing private student loans and student credit cards

Student Financial Aid News

From the Chronicle:

College students are using credit cards more than ever before, according to a survey of private-student-loan applicants released today by Sallie Mae, the giant student-loan company. Students with credit cards have an average of 4.6 of them, the report says, and half have four or more cards. The median credit-card debt is $1,645.

Ninety-two percent of respondents with credit cards said they had used them to pay for some kind of college expense. Thirty percent said they had used credit cards to pay part of tuition. Only 17 percent of respondents said they paid all of their card balances every month.

Commentary

Student credit cards and credit card balances going up should be no surprise to anyone, as many people use credit cards like a last resort line of credit. This, by the way, is far worse than any private student loan, and here’s why. Unlike student loans, credit card interest computation is done by a calculation called average daily balance, as opposed to simple amortization.

Simple amortization interest is computed based on the interest rate and balance. Your payment stays consistent, and the amount of interest you accrue scales with the amount you owe. If you pay more than the minimum payment, you pay less interest.

Average daily balance is computed based on how much your balance is every day and then interest is assessed on that average.

How do the two differ? Let’s say you have a $1,000 balance for both a private student loan and a student credit card at 12%. Let’s say for sake of example that you pay a $100 payment just 5 days before the bill comes due. You owe $900 on the loan now.

Under simple amortization, the amount of interest you would accrue for your next payment is $900 x 1% (12% / 12 months in a year), or $9.

Under average daily balance, you had a balance of $1,000 for 25 days of the month and a $900 balance for 5 days of the month. Your average daily balance would be $983.33. The amount of interest you would accrue for your next payment is $983 x 1% or $9.83.

Now, that 83 cents may not seem like a big deal, but it’s fundamentally getting you to pay more for the same amount of borrowed money, all other things being equal.

If you need funding for education, look to federal student loans first, then private student loans, and only turn to credit cards for the very, very last resort.

Scholarship Update

Recession photo scholarship. We are living in an interesting time of adjustment and change. Whether it’s stores closing, your own job search or the effects on your community, submit your photo depicting what you see happening where you live and be part of creating this historic snapshot of our lives.

Details at our free college scholarship search site.

Mail Bag

Thomas writes:

Hi, I was wondering what is the maximum amount of financial aid one could receive. Like if someone wanted to go to an out of state school would they be able to receive enough money. For example, someone wanting to go to an out of state school who’s total family income is around $25,000 a year with 3 daughters and one mom and the estimated cost of the school is around $32,000?

The maximum amount of financial aid you can receive is limited only by your FAFSA results and how diligent you are at finding scholarships. There’s no blanket estimate available based solely on family income – there are a lot of factors to take into account.