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Borrowers who want to more effectively manage their debt or get better loan terms could be interested in consolidating loans. They might even wonder if it could be a good idea to consolidate student loans and credit card debt together.
Can you consolidate student loans and credit card debt? It’s possible, but might not work the way you’d expect. Here’s what you need to know if you’re hoping to combine student loans with other debts.
Can you consolidate student loans and credit card debt?
If you’re hoping to consolidate student loans and other debts into the same loan, don’t expect to pay lower interest on the new loan.
Federal student loans have interest rates that usually beat out personal loan rates. Some private lenders can refinance student loans to lower than their current rates, but this is usually because the new loan is still classified as a student loan.
“You can refinance student loans to a lower interest rate, and that loan will still be limited to qualified education expenses,” says Phil DeGisi, CMO of lender CommonBond, which offers student loan refinancing.
Because the new loan is still a student loan, the borrower can’t use it to pay off debts besides existing college debts. This means your student debts cannot be combined with credit cards or other debts under this type of loan.
There are also some other limits in place. Borrowers can usually only qualify for loans equal to their current student loan payoff amounts. Your new loan will also have other qualities of student debt, like being harder to discharge in bankruptcy.
Using personal loans to consolidate student loans and credit card debt
If you’re really set on combining student debts with credit card debts, it can be done.
The closest you could come to accomplish this is to “take out a personal loan and use that personal loan for each of those debts,” DeGisi says. This would allow you to replace your existing debts with a single, new loan.
Usually, however, this won’t be a cost-efficient way to manage debts. “That would be unlikely to be a great path because student debt with high interest will still beat most personal loan interest rates,” DeGisi says.
The new loan could provide savings by offering a lower interest rate than you’re paying on credit card debts, but you’ll probably pay more on your student debts with this method. “Generally speaking, it isn’t going to be a great strategy for someone,” DeGisi adds.
Refinance student loans separately instead of consolidating
The bottom line is that consolidating student loans and credit card debt together likely isn’t the most cost-effective way to restructure debt. Instead, look at each type of debt separately.
Refinancing student loans, for instance, could get your a lower rate. This could help you pay off debts faster, or lower your monthly payment.
“When refinancing student loans, you can choose which loans to refinance,” DeGisi explains. “If you have one loan at a great interest rate, it might not make sense to refinance it.” Instead, you could pick the student loans with higher interest rates and only refinance those.
Options to consolidate credit card debt
If you’re interested in credit card debt consolidation, there are two common options.
The first is to transfer the balances to a new credit card with a 0% introductory balance. To optimize savings, look for one without an annual fee and pay off the balance before the 0% introductory rate ends.
The second method is to get a personal loan and use the funds from that to pay off and consolidate credit card balances. This works because personal loan rates tend to be lower than credit card rates. You’ll save money, and the installment payments will give you a defined repayment schedule.
Tips for refinancing student loans and other debts
If you want to refinance student loans and consolidate credit card debts at the same time, there are some things to watch out for.
Applying for multiple loans or credit cards at the same time, for instance, can hurt your credit.
“When you apply for the student loan refinance and apply for their personal loan — those are two separate functions and you’ll get two hard credit pulls that will go on your credit,” DeGisi points out. “The first inquiry could lower your credit score, and impact your ability to get approved for the second application.”
On the other hand, consolidating credit card debt could help other factors that lenders consider when approving a student loan refinance, DeGisi said.
When CommonBond evaluates an application, for example, they look at free monthly cash flow. If consolidating credit cards or other debts results in a lower payment, this also gives you more cash flow each month.
“That could be beneficial for qualifying for other loan options like refinancing a student loan,” DeGisi says.
Whatever your debt management goals, look at how different refinancing options can help you achieve them. You probably won’t be able to consolidate student loans and credit card debts together in a cost-effective way, but there could be another debt solution perfect for what you’re trying to accomplish.
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