So you’ve landed yourself in some high-interest debt. Maybe you got a little too comfortable with charging purchases to your credit. Or perhaps you hit a rough patch and took out a personal loan as a quick fix.
However, now you’ve racked up a balance and are probably learning the hard way how killer high-interest debt can be.
If you’re a college student, the lower student loan interest rates are probably starting to look pretty good. And you may be wondering, could you use student loans to pay off debt like credit cards or personal loans?
Student loan interest rates vs. credit cards and personal loans
Saving on interest is the biggest benefit to using student loans to pay off credit cards or other high-interest debts.
That’s significantly smaller than the interest rates most college students will qualify for on credit cards or personal loans. A typical interest rate on a student credit card is 21.4% APR, according to a 2014 study from MagnifyMoney.
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.
The average credit card balance for a college student is $650, according to a 2013 report from Sallie Mae. This balance will accrue $130 in interest in a year with a 20% APR. If it were switched to a student loan, however, the annual interest charge would be just over $24.
Key differences between student loans and credit card debt
There are some key differences between credit cards, personal loans, and student debt.
Student loans, for instance, are much more difficult to discharge in bankruptcy than consumer debts. Additionally, sticking with a credit card or personal loan and working to pay it off could be a more effective way to build credit.
On the other hand, 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 debts is also tax-deductible, saving you more money in the long-run.
If you’re aware of how different debts are handled and work, you can better determine which will be easier for you to manage.
Should you use student loans to pay off debt?
Even if you have a relatively lower credit card balance or personal loan, it’s possible to use student loans to pay off that debt. But that doesn’t necessarily mean it’s your best option, for a few reasons.
The first thing you should know is that there are legal guidelines for how student loans may be used. The Federal Student Aid Offices directs students that loan funds are “only to pay for education expenses at the school that awarded your loan.”
Education expenses include a wide range of costs, from tuition to cost of living to transportation or a personal computer. Debts, however, are not mentioned.
This means it is technically illegal to put student loan funds toward debts, even if the misuse of student loans is difficult to track and enforce. Still, you need to know that you could get in trouble with your loan originator for violating your lending agreement.
There might be some gray area if your debt was incurred during college while paying for expenses that could fall under the FSA’s definition of educational expenses. If you want to stay on the safe side, it’s probably best to limit your student loan use to covering these kinds of debts.
Other alternatives for paying down high-interest debts
Paying down high-interest debts now, with cash, could save you more in the long-run than just bumping it over to your student loan balance. Consider working a side job to get the extra funds together to pay it off.
You could also look into transferring the balance to a new credit card with a 0% introductory rate or get an interest-free loan from parents. This way you can avoid high-interest charges while you’re working towards paying off the debt.
At the end of the day, try and work towards pre-paying 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.
And in the meantime, work out a college budget to avoid repeating your debt mistakes.
Need a student loan?Here are our top student loan lenders of 2018!
|1 Important Disclosures for CollegeAve.
College Ave Student Loans products are made available through either Firstrust 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.
2 Important Disclosures for Discover.
3 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB) or Turnstile Capital Management, LLC (TCM), which are not affiliated entities. Certain restrictions and limitations may apply. Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. All loan products may not be available in certain jurisdictions. Other terms and conditions apply. Ascent is a federally registered trademark of TCM and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
* 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.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for PNC.
PNC Bank is one of the nation’s largest education loan providers. For over 40 years, PNC has been committed to helping students and their families make possible the adventure of college.
6 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2018 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
7 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
8 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
9 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|3.69% – 10.94%1||Undergraduate, Graduate, and Parents||Visit CollegeAve|
|3.97% – 12.97%3||Undergraduate and Graduate||Visit Ascent|
|4.34% – 12.99%2||Undergraduate and Graduate||Visit Discover|
|4.12% – 10.98%*,4||Undergraduate and Graduate||Visit SallieMae|
|5.03% – 11.23%5||Undergraduate and Graduate||Visit PNC|
|4.00% – 13.00%6||Undergraduate and Graduate||Visit SunTrust|
|4.72% – 9.81%7||Undergraduate and Graduate||Visit LendKey|
|3.72% – 9.68%8||Undergraduate, Graduate, and Parents||Visit CommonBond|
|4.19% – 12.06%9||Undergraduate, Graduate, and Parents||Visit Citizens|