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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1 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
2 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 4/1/2020. Variable interest rates may increase after consummation.
3 Important Disclosures for Discover.
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.
4 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restrictions. Loans are offered through CommonBond Lending, LLC (NMLS #1175900).
5 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). 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. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (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 applicant’s ability to supply the necessary information for submission.
5 Important Disclosures for Citizens.
Undergraduate Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As March 1, 2020, the one-month LIBOR rate is 1.62%. Variable interest rates range from 2.72% – 10.98% (2.72% – 10.83% APR) and will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. Fixed interest rates range from 4.72% – 12.19% (4.72% – 12.04% APR) based on applicable terms, level of degree earned and presence of a co-signer. Lowest rates shown requires application with a co-signer, are for eligible applicants, require a 5-year repayment term, borrower making scheduled payments while in school 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. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens One is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of the loan.
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 with the Education Refinance Loan. Borrowers should carefully review their current benefits, especially if they work in public service, are in the military, 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 and replace those with the benefits of the Education Refinance Loan. 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 at http://www.citizensone.com/EdRefinance, 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.
Citizens One Student Loan Eligibility: Borrowers must be enrolled at least half-time in a degree-granting program at an eligible institution. Borrowers must be a U.S. citizen or permanent resident or an international borrower/eligible non-citizen with a creditworthy U.S. citizen or permanent resident co-signer. For borrowers who have not attained the age of majority in their state of residence, a co-signer is required. Citizens One reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Citizens One Student Loans private student loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, and if applicable, self-certification form, school certification of the loan amount, and student’s enrollment at a Citizens One Student Loans-participating school.
Please Note: International Students are not eligible for the multi-year approval feature.
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.
|2.75% – 10.65%*,1||Undergraduate and Graduate|
|2.69% – 10.97%2||Undergraduate, Graduate, and Parents|
|2.80% – 11.37%3||Undergraduate and Graduate|
|3.52% – 9.50%4||Undergraduate and Graduate|
|5.20% – 14.18%5||Undergraduate and Graduate|
|2.72% – 10.98%6||Undergraduate and Graduate|