Did Credit Cards Take You Through College? Here’s a Lesson in Shaving That Debt

Q I used two credit cards to pay for a year of graduate school. Now I am faced with an $8,000 debt that I must pay off before it eats me alive. What is the best strategy? I can afford to pay $200 to $300 a month on the debt.

--C.H.

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A You didn’t tell us the interestrates your credit cards carry, but we’ll assume that as a student you qualified for one of the least attractive programs, probably one carrying an 18% rate.

At that rate and assuming you make monthly payments of $200, it would take you 61 months (five years and one month) to retire the debt. If you pay $300 per month, it would take you 35 months (two years, 11 months) to pay off your loans.

Besides increasing your payments above $300 per month, what can you do to get out of debt faster? Your best hope is to transfer your credit balances to a card carrying a lower interest rate. In the best of all worlds, you would be able to qualify for one with a loss-leader interest rate of 4.9% to 6.9% that many credit companies are offering to lure you aboard.

Of course, these rates are only good for six months or so, but if you’re smart, you can keep transferring your balance to a new card offering the artificially low rates until you’re debt-free. Not surprisingly, credit card companies hate this strategy, but they know consumers do it. Of course, you won’t qualify for the super-reduced rates if your credit is maxed out or if your payment history is spotty. But surely you can find a card with a rate lower than the one you have.

Here’s what could happen if you transfer your balance, according to Richard Pittman, chief counselor at the Consumer Credit Counseling Service of Southern California, a nonprofit program with offices nationwide. At 6% interest and with $200 monthly payments, you will need just 45 months (three years, nine months) to retire the $8,000 balance, contrasted with 61 months at 18%. And at $300 per month at 6%, it would take 29 months (two years, five months) to pay off the $8,000, contrasted with 35 months at 18%. Your total savings from switching to the lower-rate card: $3,200 in interest if you’re paying $200 per month and $1,800 if you’re making $300 monthly payments.

Here’s something else to remember: Don’t use the credit card on which you’re carrying the student loan balance for anything else. Because you’re carrying a balance, any new charges will automatically be charged the applicable interest rate, driving up the cost of anything you buy. If you absolutely must have a credit card, get a separate one and be sure to charge only what you can afford to pay off each month. Any additional revolving credit you incur will only make your situation worse.

Anyone needing credit counseling or advice may call the Consumer Credit Counseling Service at (213) 808-4222.

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Q I understand that taxpayers can each give anyone else up to $10,000 per year without being subject to the gift tax provisions of the income tax code. How is this done? Do you have to notify the IRS of it? Does forgiving a debt count as part of the $10,000?

-- M.J.

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A Taxpayers may give anyone (not just their children or other relatives) up to $10,000 per year without being subject to federal gift-tax provisions. However, before getting too excited about these “tax-free” gifts, look at whom the tax-free applies to: the recipients. You, the donor, already paid taxes on the money when it was accumulated as income. You’re just spreading the wealth around, and if you do it in individual annual chunks of $10,000 or less, the recipients and donors can escape additional taxation by Uncle Sam. However, if the annual gifts exceed $10,000 per individual, the donor may be subject to taxation. The applicable taxes aren’t actually levied, though, until an individual has completely exhausted his or her $600,000 lifetime gift limit. For the purposes of this discussion, debt forgiveness counts as a gift.

Annual gifts of $10,000 or less, including any debt forgiveness, do not require the filing of any notice with the IRS. However, a gift tax return on Form 709 must be filed for a gift made to someone other than your spouse if it exceeds $10,000. Married couples who agree to split a $20,000 gift must report this to the IRS even though there are no gift tax implications. Depending on your circumstances, you may be able to file the short form, Form 7098-A, instead.

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Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053 Or send e-mail to carla.lazzareschi@latimes.com