Can I Use My Student Loans to Pay Off Debt, Credit Cards?

 November 30, 2020
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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

Before using student loans to pay off debt, consider the interest rates

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.

Despite the potential savings, using student loans to pay off debt may not be smart

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.

Using student debt to pay off other debt could violate your loan agreement

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.

Know that there are alternatives to using student loans for credit cards and other debt

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:

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!
LenderVariable APREligibility 
1.19% – 11.98%1Undergraduate
Graduate

Visit College Ave

1.62% – 11.73%*,2Undergraduate
Graduate

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0.94% – 11.44%3Undergraduate
Graduate

Visit Earnest

1.64% – 11.45%4Undergraduate
Graduate

Visit Ascent

1.89% – 11.92%5Undergraduate
Graduate

Visit SoFi

0.00%6Undergraduate
Graduate

VISIT CITIZENS

N/A7Undergraduate
Graduate

Visit FundingU

0.00% – 23.00%8Undergraduate
Graduate

Visit Edly

* 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.

CollegeAve Disclosures

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.

Rates shown are for the College Ave Undergraduate Loan product and include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.

This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary. This informational repayment example uses typical loan terms for a first year graduate student borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 7.10% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $141.66 while in the repayment period, for a total amount of payments of $16,699.21. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.

Information advertised valid as of 4/19/2022. 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 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.

3 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.

Earnest Disclosures

Actual rate and available repayment terms will vary based on your income. Fixed rates range from 3.49% APR to 13.03% APR (excludes 0.25% Auto Pay discount). Variable rates range from 1.19% APR to 10.14% 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.


4 Important Disclosures for Ascent.

Ascent Disclosures

Ascent loans are funded by Bank of Lake Mills, Member FDIC. Loan products may not be available in certain jurisdictions. Certain restrictions, limitations; and terms and conditions may apply. For Ascent Terms and Conditions please visit: AscentFunding.com/Ts&Cs

Rates are effective as of 05/01/2022 and reflect an automatic payment discount of either 0.25% (for credit-based loans) OR 1.00% (for undergraduate outcomes income-based loans). Automatic Payment Discount is available if the borrower is enrolled in automatic payments from their personal checking account and the amount is successfully withdrawn from the authorized bank account each month. For Ascent rates and repayment examples please visit: AscentFunding.com/Rates.

1% Cash Back Graduation Reward subject to terms and conditions, please visit AscentFunding.com/Cashback. Cosigned Credit-Based Loan student borrowers must meet certain minimum credit criteria. The minimum score required is subject to change and may depend on the credit score of your cosigner. Lowest APRs are available for the most creditworthy applicants and may require a cosigner.


5 Important Disclosures for SoFi.

Sofi Disclosures

UNDERGRADUATE LOANS: Fixed rates from 3.47% to 11.16% annual percentage rate (“APR”) (with autopay), variable rates from 1.89% to 11.92% APR (with autopay). GRADUATE LOANS: Fixed rates from 4.60to 11.06% APR (with autopay), variable rates from 2.59% to 11.82% APR (with autopay). PARENT LOANS: Fixed rates from 4.48% to 11.16% APR (with autopay), variable rates from 1.69% to 11.92% APR (with autopay). For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. Interest rates for variable rate loans are capped at 13.95%, unless required to be lower to comply with applicable law. Lowest rates are reserved for the most creditworthy borrowers. If approved for a loan, the interest rate offered will depend on your creditworthiness, the repayment option you select, the term and amount of the loan and other factors, and will be within the ranges of rates listed above. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. Information current as of 05/04/2022. Enrolling in autopay is not required to receive a loan from SoFi. Loans originated by SoFi Lending Corp. or an affiliate (dba SoFi), licensed by the Department of Financial Protection and Innovation under the California Financing Law License No. 6054612. NMLS #1121636 (www.nmlsconsumeraccess.org).


6 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

Undergraduate Rate Disclosure: Fixed interest rates range from 3.48% – 11.64% (3.48% – 10.78% APR).

Graduate Rate Disclosure: Fixed interest rates range from 4.89% – 11.64% (4.89% – 11.34% APR).

Business/Law Rate Disclosure: Fixed interest rates range from 4.49% – 10.39% (4.49% – 9.68% APR).

Medical/Dental Rate Disclosure: Fixed interest rates range from 4.43% – 9.19% (4.44% – 8.89% APR).

Parent Loan Rate Disclosure: Fixed interest rates range from 4.80%-8.23% (4.80%-8.24% APR).

Bar Study Rate Disclosure: Fixed interest rates range from 7.39% – 12.94% (7.40% – 12.83% APR).

Medical Residency Rate Disclosure: Fixed interest rates range from 6.99% – 10.49% (6.98% – 10.09% APR).

ERL Variable Rate Disclosure: Variable interest rates are based on the 30-day average Secured Overnight Financing Rate (“SOFR”) index, as published by the Federal Reserve Bank of New York. As of May 1, 2022, the 30-day average SOFR index is 0.29%. Variable interest rates will fluctuate over the term of the loan with changes in the SOFR index, and will vary based on applicable terms, level of degree and presence of a co-signer. The maximum variable interest rate is the greater of 21.00% or the prime rate plus 9.00%.

Fixed Rate Disclosure: Fixed rate ranges are based on applicable terms, level of degree, and presence of a co-signer.

Lowest Rate Disclosure: Lowest rates are only available for the most creditworthy applicants, require a 5-year repayment term, immediate repayment, a graduate or medical degree (where applicable), and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Rates are subject to additional terms and conditions, and are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.

Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer.  Borrowers should carefully review federal benefits, especially if they work in public service, are in the military, are considering possible loan forgiveness options, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision on our website including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.

Eligibility Criteria: Applicants must be a U.S. citizen, permanent resident, or eligible non-citizen with a creditworthy U.S. citizen or permanent resident co-signer. For applicants who have not attained the age of majority in their state of residence, a co-signer is required. Citizens Bank reserves the right to modify eligibility criteria at any time. Citizens Bank private student loans are subject to credit qualification, completion of a loan application/Promissory Note, verification of application information, and if applicable, self-certification form, school certification of the loan amount, and student’s enrollment at a Citizens Bank participating school.

Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.

Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.


7 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.


8 Important Disclosures for Edly.

Edly Disclosures

1. Loan Example:

  • Loans from $5,000 – $20,000
  • Example: $10,000 IBR Loan with a 7% gross income payment percentage for a Senior student making $65,000 annually throughout the life of the loan.
    • Payments deferred for the first 12 months during final year of education.
    • After which, $270 Monthly payment for 12 months.
    • Then $379 Monthly payment for 44 months.
    • Followed by one final payment of $137 for a total of $20,610 paid over the life of the loan.

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.