Can I Use My Student Loans to Pay Off My Debts?

loans to pay off debt

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.

Federal student loan interest rates are generally designed to keep college affordable and accessible. Currently, interest rates for undergraduate Direct loans are set at 3.76%.

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?

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LenderRates (APR)Eligibility 

1 = Citizens Disclaimer.

2 = CollegeAve Autopay Disclaimer: 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.
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