When it comes to consumer debt, it’s not uncommon to feel fixated on making it go away fast. High interest rates can make it feel like your minimum payments are doing nothing toward paying down the principal, and somehow, each monthly bill looks larger than the last. Whether you’ve leaned on credit cards to cover you between paychecks or took out a personal loan for an emergency, debt can feel all-consuming.
You may be thinking of creative fixes for how to lose the debt — and the accompanying stress. And if you’re a college student, lower student loan interest rates are probably starting to look pretty good. You may be wondering, could you use your student loans to pay off debt, such as credit cards or personal loans?
The numbers: Interest rates for student loans vs. credit cards and personal loans
Using student loans to pay off credit cards or other high-interest debts 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 5.05%. That is likely 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 16.91%, but some evidence suggests that the average APR of a student credit card may be even higher. That’s more than three times higher than federal student loan interest rates, which means these balances will grow three times faster than student loans.
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 year toward the principle, you would accrue $121 in interest in a year. If it were switched to a student loan, however, and you paid $100 toward the principle, the annual interest charge would be $33.
Should you use student loans to pay off debt?
While the numbers may seem convincing, there are reasons to hold off on using student loans to pay down consumer debt — that’s because there are some key differences between credit cards, personal loans and student 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 debts is also tax-deductible, saving you more money in the long-run.
On the other hand, student loans are much more difficult to discharge in bankruptcy than consumer debts. 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 moving 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 debts may seem like a smart short-term strategy, you’re still dealing with debt and a large balance can quickly become overwhelming.
Using student loans to pay off debts could be considered misuse of student loan funds
Additionally, there are legal guidelines for how student loans may be used. The Federal Student Aid (FSA) Offices directs students that loan funds are “only to pay for education expenses at the school that awarded your loan.” Educational expenses include a wide range of costs, such as tuition, room and board, transportation and a personal computer — debts, however, are not mentioned.
This means that using student loans to pay down debt may technically fall under the categorization of misuse of student loans. That said, misuse of student loans is difficult to track and enforce. 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.
Consequences could include fines and being liable to the school for any funds that are retroactively taken back. Misusing student loans can also have a negative effect on other students, as they may be missing out on funding they need for their education because of the funds you requested to cover your bills.
Note that 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, such as travel related to school or a car used to get to class. But 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.
Alternatives ways to pay 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. There are a number of ways you could work toward paying off your debts.
One option is to get a side job and put the extra funds you earn towards paying off your debt. Or, depending on your relationship, you could consider asking relatives for an interest-free loan. If graduation is around the corner, it may be a good idea to earmark any financial gifts toward paying down credit card debt. You could also look into transferring the balance to a new credit card with a 0% introductory rate.
If you are able to pay down those debts, try and work toward 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.
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.
Anna Davies contributed to this report.
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|* 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.
** Discover's lowest rates shown are for the undergraduate loan and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments.
1 Important Disclosures for Earnest.
Explanation of Rates “With Autopay” (APD)
In school deferred payment is not available in AL, AZ, CA, FL, MA, MD, MI, ND, NY, PA, and WA).
2 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
3 Important Disclosures for College Ave.
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.
(1)All rates shown include the auto-pay 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.
(2)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.
(3)As certified by your school and less any other financial aid you might receive. Minimum $1,000.
Information advertised valid as of 7/1/2019. Variable interest rates may increase after consummation.
4 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.
5 Important Disclosures for Discover.
|3.99% – 11.44%1||Undergraduate and Graduate|
|3.98% – 11.35%*,2||Undergraduate and Graduate|
|3.96% – 11.98%3||Undergraduate, Graduate, and Parents|
|3.66% – 9.64%4||Undergraduate and Graduate|
|3.87% – 11.87%**,5||Undergraduate and Graduate|