Note that the government has paused all repayment on federally held student loans through the end of 2022, with no interest to be charged during that period and no loans to be held delinquent or in default.
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Whether you’ve leaned on credit cards to cover you between paychecks or took out a personal loan for an emergency, the debt can start to haunt your finances.
You may already be working through creative solutions, such as using student loans to pay off debt. And if you’re a college student or recent graduate, lower student loan interest rates are probably looking good against those higher APRs of credit cards and personal loans.
But even with the potential savings, this debt-shuffling strategy may not always be wise. Here are four facts to unpack before you decide:
1. Merits of paying off debt with student loans depends on the interest
2. Using student loans to pay off debt may not be smart
3. Paying off other debt could violate your loan agreement
4. There are alternatives to using student loans in this way
Using student loans to pay off credit card or other high-interest debt may seem like a good idea when it comes to saving on interest.
Federal student loan interest rates are generally designed to keep college affordable and accessible. Currently, the fixed interest rate for undergraduate direct loans (subsidized and unsubsidized) is set at 2.75% for the 2020-21 school year. It’s likely to be significantly lower than the interest rates most college students would qualify for on credit cards or personal loans.
A typical credit card interest rate is around 15.00% or higher, but some evidence suggests that the average APR of a student credit card may be even higher. That’s more than five times higher than federal student loan interest rates, which means these balances will grow five times faster than student loans.
Of course, if you have a higher student loan interest rate (depending on when you borrowed) or a lower credit card APR, the difference could be smaller.
Averages tell an important story, though. The average credit card balance for a college student is $1,183, according to a 2019 Sallie Mae report. With a 17% APR, if you paid $100 a month toward the principal, you would accrue $121 in interest in a year. If it were switched to a student loan at the 2020-21 federal undergrad rate, however, and you paid $100 toward the principal, the annual interest charge would be $18.
While the numbers may seem convincing, there are reasons to hold off on using student loans to pay off debt — that’s because there are some key differences between credit cards, personal loans and education debt.
Federal student loans offer some unique perks. They offer options like income-driven repayment plans that can help keep payments affordable if your income is low. Interest paid on student debt is also tax-deductible, saving you more money in the long-run.
On the other hand, student loans have been historically more difficult to discharge in bankruptcy than consumer debt. This means that student loans are more likely to follow you throughout your life, as turning consumer debt into student loan debt may make it harder for you to ever get out of debt if you need to turn to bankruptcy as a last resort.
Additionally, sticking with a credit card or personal loan and working to pay it off could be a more effective way to build credit. Rather than shuffling debt, it may be a smarter strategy to focus on paying down consumer debt, and then coming up with ways to pay down your student loan as well.
Low interest is still interest, and that interest will accumulate over time. While using student loans to pay off debt may seem like a smart short-term strategy, you’re still dealing with a large balance that could become overwhelming very quickly.
In addition, there are legal guidelines for how student loans may be used. The Federal Student Aid (FSA) Offices contends that “all loan funds must be used for your education expenses.” You can spend student loans on costs including tuition, room and board, transportation and a personal computer.
This means that using student loans to pay down debt may technically fall under the categorization of misuse of student loans. It’s difficult for the Department of Education to track and enforce “misuse,” but if your loan originator finds out that this is how you’ve used your loans, you might get in trouble for violating your lending agreement and be subject to punishment, such as a fine or losing your eligibility for future financial aid.
Note that there might be some gray areas if your debt was incurred during college. Maybe you used student loans for living expenses that fall under the FSA’s definition of educational expenses, such as travel related to school or a car used to get to class.
You could also be in the clear if you’re using student loans to pay off credit card debt accumulated for generally approved education expenses. If you used the plastic in your wallet to buy a new laptop (so that could score the cash-back bonus, for example), using student loans to pay off credit card balances makes more sense.
Paying down high-interest debt now, with cash, could save you more in the long-run than just bumping it over to your student loan balance.
There are many ways you could make this sort of progress without resorting to using student loans to pay off debt, including:
- Getting a side job and applying extra funds you earn towards paying off your highest-interest debt first
- Earmarking financial windfalls, such as graduation gifts for your debt accounts
- Borrowing money from family or friends, maybe in the form of a low-interest loan
- Transferring a balance to a new credit card with a 0% introductory rate
- Taking out a debt consolidation loan, perhaps with the help of a cosigner
If you are able to pay down debt, try and work toward prepaying your student debt once you’ve graduated. Getting ahead on payments will help you save on interest so you can work toward being completely debt-free.
In the meantime, suss out what got you into debt in the first place. A budget can help you stay on track and avoid these issues in the future. It also may be a good idea to come up with a plan to build an emergency savings account to cover unexpected expenses.
While you may have been on a tight budget as a student, having good financial habits can help you manage a salary and stop debt from spiraling out of control in the future.
Andrew Pentis and Anna Davies contributed to this report.
Need a student loan?Here are our top student loan lenders of 2022!
|2.49% – 13.85%1||Undergraduate|
|2.55% – 11.44%2||Undergraduate|
|3.25% – 13.59%3||Undergraduate|
|0.00% – 23.00%4||Undergraduate|
|3.25% – 9.69%6||Undergraduate|
|* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
1 Important Disclosures for College Ave.
College Ave Student Loans products are made available through Firstrust Bank, member FDIC, First Citizens Community Bank, member FDIC, or M.Y. Safra Bank, FSB, member FDIC.. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Information advertised valid as of 9/15/2022. Variable interest rates may increase after consummation. Approved interest rate will depend on the creditworthiness of the applicant(s), lowest advertised rates only available to the most creditworthy applicants and require selection of full principal and interest payments with the shortest available loan term.
2 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.
Actual rate and available repayment terms will vary based on your income. Fixed rates range from 3.47% APR to 13.03% APR (excludes 0.25% Auto Pay discount). Variable rates range from 2.80% APR to 11.69% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. Although the rate will vary after you are approved, it will never exceed 36% (the maximum allowable for this loan). Please note, Earnest Private Student Loans are not available in Nevada. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account. It is important to note that the 0.25% Auto Pay discount is not available while loan payments are deferred.
3 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
4 Important Disclosures for Edly.
1. Loan Example:
About this example
The initial payment schedule is set upon receiving final terms and upon confirmation by your school of the loan amount. You may repay this loan at any time by paying an effective APR of 23%. The maximum amount you will pay is $22,500 (not including Late Fees and Returned Check Fees, if any). The maximum number of regularly scheduled payments you will make is 60. You will not pay more than 23% APR. No payment is required if your gross earned income is below $30,000 annually or if you lose your job and cannot find employment.
2. Edly Student IBR Loans are unsecured personal student loans issued by FinWise Bank, a Utah chartered commercial bank, member FDIC. All loans are subject to eligibility criteria and review of creditworthiness and history. Terms and conditions apply.
5 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
6 Important Disclosures for Funding U.
Funding U Disclosures
Offered terms are subject to change. Loans are made by Funding University which is a for-profit enterprise. Funding University is not affiliated with the school you are attending or any other learning institution. None of the information contained in Funding University’s website constitutes a recommendation, solicitation or offer by Funding University or its affiliates to buy or sell any securities or other financial instruments or other assets or provide any investment advice or service.