How Do Student Loans and Credit Card Debt Interact to Cause More Debt and Lead to Default?
July 16, 2014

As of 2010, student loan debt grew larger than credit card debt for the first time and has remained higher ever since. As student loan debt has grown, so has the student loan cohort default rate. So what does this have to do with credit card debt? According to a recent study by the Federal Reserve Board and Colgate University, those who have student loans also have credit card debt which can exacerbate debt struggles and lead to increasing default rates for both student loans and credit cards.

Credit cards

Find out how credit cards and student loans interact
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Student Loans + Credit Cards = Mountain of Debt

70% of students borrow to pay for school and, of those, nearly 70% also have credit card debt as well. During the time period that student loan and credit card indebtedness increased and default rates increased, bankruptcy filings increased as well for those aged 25 to 34 years. And of all the different kinds of debt, student loans carry the highest rate of default, far surpassing credit cards, home loans and car loans.

Other Factors That Make Debt Worse for Recent Grads

Not only are the rates of debt on the rise for college students but graduation rates are down – it’s harder to pay back student debt and credit cards without a degree. And unemployment is on the rise for recent graduates – also making it harder to pay back debt. And because of high unemployment, many grads take lower paying jobs that can also make it tough to pay their bills. Chronic unemployment and underemployment are serious obstacles to managing debt.

Outcomes from Not Paying Student Loans and Credit Cards

For those graduates that have both credit card debts and student loans, but not enough money to service both, a choice must be made and the study considered the outcomes from not paying one or the other. If you don’t pay student loans, you face wage garnishment, other collections efforts and a lower credit score. If you don’t pay credit cards, you face collection efforts, lower credit and may be blocked out of other borrowing as a consequence of non-payment.

Interest Rates as a Factor of Default

Interestingly, the study found that interest rates are not a key driver in determining student loan default. But when it comes to credit card debt, higher interest rates are indicative of a tendency towards default. However, higher interest rates on credit cards are more common with riskier customers so debtors that default on credit cards may already be on the path to financial uncertainty.

Bankruptcy Differentials for Student Loans and Credit Cards

The upside of credit card debt is that it can be easily discharged in bankruptcy. Student loans can also be discharged in bankruptcy, but it’s a more arduous process with a higher bar to success. To use bankruptcy to dispose of student loans, you must be in a low-income situation which is likely to persist. If you are simply in a short-term money crunch, you’re not likely to get student loan relief in bankruptcy. But opting for bankruptcy and ditching other debts may make you more able to pay your student loans.

How Do the Two Types of Debt Interact?

These study findings are particularly interesting. First, for those that default on credit cards, they also default on student loans. Debtors prefer to default on student loans first and will give credit card debt preference for payment, so if they default on credit cards, they have already let their student loans fall by the wayside. People with low or no credit card debt are much less likely to default on student loans. Those with low levels of both types of debt whose earnings don’t allow them to pay both will allow student loans to default rather than credit cards.

Click here to download and read the entire study to find out how your credit card debts may increase your risk of student loan default. Be sure to sign up for’s free student loan tool to keep track of all your student loans in one easy dashboard and read our blog often for news and tips on student loans and personal finance.