When Using Other Loans to Pay Off Student Debt Is a Good Idea

Most college students barely stop to think about the impact student loan debt may have on them in their future. After all, they’re looking for a solution to finance their education, now. The substantial debt they’re racking up to cover tuition and fees is another problem for another day.

It isn’t until sometime after graduation, when those loan payments start becoming due, that many consumers begin to think about how to handle their outstanding student loan debt.

If you find yourself currently wondering about the best way to approach your student loan debt, you might want to take a moment to consider using a personal loan or even a home equity line or home equity loan.

These options, of course, are not necessarily right for everyone, and you should certainly consider all the pros and cons before pulling the trigger. Yet there are several big benefits to paying off student loan debt with some other form of credit.

Benefit No. 1: Conversion to Dischargeable Debt

One of the biggest issues many borrowers face when it comes to student loans is the fact that the debt is typically not statutorily dischargeable in a bankruptcy. This fact holds true even if you never actually graduated or obtained a degree.

A consumer may rely on bankruptcy to help alleviate the financial pressure of just about any other type of credit obligation, but bankruptcy relief from a student loan is unavailable except under very special circumstances. Using other loans, however, to pay off your student loans removes this potential obstacle.

Of course, you should never take out a new loan with the intent of later including it in a bankruptcy. That’s called fraud. Yet it can certainly give you peace of mind to know that all your debt could potentially be included in bankruptcy if the need were ever to arise. For most consumers, bankruptcy is the last resort, but it can be comforting to know that you have the option nonetheless.

Related: Debt Diaries: Real-Life Stories of Debt, Bankruptcy, and Recovery

Benefit No. 2: Credit Reporting Limitations

Another problem when it comes to student loans is that when they’re in default and unpaid, they don’t have a credit reporting expiration date. An unpaid student loan in default can haunt your credit history forever.

In fact, the Fair Credit Reporting Act (FCRA), the law that governs credit reporting time limits, does not even address federal student loans at all. Those accounts are governed instead by the Higher Education Act — which says unpaid defaulted student loan debt is permitted to remain on your credit reports forever.

When you pay off your student loan debt with another type of loan, the new debt will be subject to credit reporting limitations. If a personal loan or any type of home equity account goes into default, the FCRA will require that negative debt to be removed from your credit reports within seven years. It’s not a great silver lining, but it’s better than a stick in the eye.

Related: Why You Need to Check Your Credit Report With All Three Credit Bureaus

Benefit No. 3: No Potential Loss of Government Benefits

You could face some harsh consequences if your student loans ever go into default. Not only is student loan debt typically ineligible for inclusion in a bankruptcy, and not only can unpaid, derogatory student loan accounts remain on your credit reports forever, but you could also lose various government benefits due to defaulted federal student loan debts as well.

If you default on your student loans, the government can exercise extreme measures to collect your debt. Your wages could be garnished. Tax refunds (both federal and state) can be withheld and applied toward your outstanding debt.

In fact, a portion of your Social Security payments could be garnished – even if that’s your sole source of income and the garnishment causes severe financial hardship. As Benjamin Franklin said, “But in this world, nothing can be said to be certain, except death and taxes.” And, perhaps, the government’s ability to collect your student loan payments.

Point being, unless you’re the rare borrower who qualifies for student loan forgiveness, you’re going to pay them, or you’re going to die with them.

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John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. He has written four books on the topic and has been interviewed and quoted thousands of times over the past 10 years. With time spent at Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.

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