When it comes to credit card debt, it’s natural to seek out ways to pay it off as quickly as possible. With high-interest rates, minimum monthly payments barely make a dent in the principal and getting out of debt feels like an uphill battle. And if you’re a student, you might be wondering if using your lower interest student loans to pay down your credit cards is the right solution. It might seem like a no brainer, but there are more complicated factors to consider. Here are a few things you should keep in mind when making your decision.
Student Loans Have a Low-Interest Rate
Student loans typically have a much lower interest rate than credit cards. The average interest rate on all student loans is 5.8%. Comparatively, credit cards have an average interest rate of 18%, meaning that the balance will grow about three times as fast as your student loans.
According to a 2019 Sallie Mae report, college students have an average credit card balance of $1,183. If you were to pay off your student loans quickly after college, you would be saving some money with the lower interest rates.
Paying your cards off with student loan debt could be a tempting proposition because of the rate difference. However, there are other things to consider.
Moving Debt Isn’t a Solution
Unless you pay off your student loans immediately after finishing college, it’s still going to be accruing interest and you’ll still be making payments on it. No matter what form it’s in, you still have to pay off the debt, it does not go away just because you moved it.
Unless you’re close to graduation and have a position secured, it’s hard to predict when you’ll find a job after college and what kind of salary you’ll be receiving when you do get it. Finding ways to pay off the credit card debt as soon as possible instead of putting it off is a much smarter solution to the problem.
You Could Violate Your Loan Agreement
Using your student loans might be considered a misuse of funds. The Federal Student Aid Offices indicate exactly what the awarded money can be used for – including educational expenses and necessary living expenses. While these categories do include a range of costs, including tuition, room and board, textbooks, computers, and transportation, they do not include personal debt. So, any credit card debt you incurred by going to the movies, paying your Spotify subscription, and dining out on the weekends likely wouldn’t qualify.
If you used your credit card to pay for any of those items that fall under the definition of educational expenses, such as purchasing a computer or a car to get to class, you might be in the clear. But it’s best to use your student loan funds to cover these expenses directly to avoid any trouble.
While these rules aren’t well enforced, if your loan facilitator discovers that you’ve misused your funds, you could face consequences. You could be fined, and your loan could be retroactively taken back.
Student Loans Are Not Eligible for Bankruptcy
If you ever need to file bankruptcy, it’s important to understand that it’s much more difficult to discharge your student loans than it is to discharge your credit card debt because of different repayment terms. That means any amount you owe on your student loans will be far more likely to follow you throughout your life. If you face significant financial hardships after graduation, you’ll have limited options, making the process even more difficult, so it’s a smart idea to only borrow what you need for the intended use.
While payment plans are available to help you make manageable payments on your student loans after graduation, the term of your loan will be extended, meaning you’ll be increasing the amount of interest you accrue.
Alternative Ways to Pay Down Your Debt
Since paying off your credit card debt sooner rather than later is likely to save you money and keep you in line with the terms of your student loans, it’s usually best to find other ways to pay it off. Thankfully, there are a lot of good alternative ways for you to pay down your debts.
- Find a Part-Time Job: Getting a part-time job is a great way to earn extra money to pay down debts. Many campus career centers have job boards advertising student-friendly work in the local community. And once your debt is paid down, you’ll have the extra income to build a savings account and spend on entertainment.
- Cut Spending: While it might be difficult to cut spending when you’re already on a tight budget as a student, looking over your expenses and cutting costs where you can free up more money to pay off your debts. You might be able to cut down on the number of meals you eat out, the number of subscription services you have, and spontaneous trips to the mall.
- Ask Family or Friends for a Loan: If working part-time isn’t an option, you could ask a trusted friend or relative for an interest-free loan. While it can be an uncomfortable conversation to have, as long as a repayment plan is written up in a contract, you could save a lot of money on interest.
- Consider a 0% APR Credit Card: If you plan on being able to pay off your credit card debt within the next several months, you could transfer your balance to a new credit card with a 0% APR promotional period. As long as you pay down the balance before the promo ends, you’ll be able to avoid accruing more interest on the debt. Of course, if you fail to pay it off, you’ll be faced with the regular interest rate.
Once you do pay down your credit card debt, consider setting aside money to pre-pay your student loans after you’ve graduated. The faster you pay them off, the less you’ll pay in interest.
The Bottom Line
While it can be tempting to use your student loans to pay off your credit card debt, it’s not always the best idea. You’ll still need to pay off the debt when it comes time to pay off your loans, you could face penalties for violating your loan terms, and your student loans won’t qualify for bankruptcy. Earning extra money, reducing your expenses, and transferring your card balance to a balance transfer card are some better alternatives to help you pay off your credit card debt quickly.