Should You Use Student Loans to Pay off Credit Card Debt?

In some cases, when a person takes out a student loan, they get more cash than they need to cover their tuition, housing, and other college costs. When this happens, figuring out what to do with the excess can be challenging. At times, the simplest choice is to send it back to the student loan company. But, if you have credit card debt, is that the best move? If you are wondering whether you should use school loans to pay off credit card debt, here’s what you need to know.

Student Loan Interest Rates Are Lower

Typically, the rate you’ll get on a student loan is far lower than what you’ll have on a typical credit card. For the period between July 1, 2019, and July 1, 2020, the interest rate on direct subsidized loans and direct unsubsidized loans from the federal government is 4.53 percent. Compare that to an average credit card interest rate of 15.09 percent, and it is easy to see why using a student loan to pay off a credit card would be an attractive idea.

With the lower interest rate, you’d pay less over time by paying off your credit card with your student loan. That’s an important consideration.

Streamline Your Monthly Payments

By rolling your credit card into your student loan, you’d streamline your monthly payments. You’d have one set amount to pay each month, making your budget easier to manage thanks to the increased predictability.

If stability is a goal, then using your student loan to pay off a higher interest credit card could give you that. The two debts become a single line item, making it easier to track.

Empty Credit Card Temptation

When you pay off a credit card, you have the ability to charge that amount all over again. If you don’t intend to close your credit card account, then that temptation may be hard to resist. As a result, you may begin ringing up a new credit card balance quickly, creating even more debt.

If you aren’t sure you could refrain from using the credit card after its paid off and don’t intend to close the account, you might not want to pay it off with your student loan. If you do, you could be getting yourself into deeper financial trouble, which isn’t ideal.

Issues During Bankruptcy

While few people plan to file for bankruptcy in the future, it certainly happens. If you get in a bad financial situation and have to file, credit card debts are often dischargeable. You could rid yourself of that burden during the bankruptcy process.

In contrast, federal student loans can’t be discharged during bankruptcy. They stick with you regardless of the financial hardship. If you pay off your credit cards with your student loan, you are effectively moving a dischargeable debt into one that isn’t. That’s a risk that exists, so it’s important to take it into consideration.

It Might Be Against the Rules

When you have money from a student loan, there can be rules about how you use it. Federal student loans are limited to educational expenses at your school. Usually, this includes tuition, room and board, certain transportation costs, and specific tools, supplies, and equipment.

Technically, if you use your federal student loan to pay off a credit card, you could be misusing those funds. You’d be violating your lending agreement, and that could come with ramifications.

Now, it could be hard for your lender to prove that’s what occurred, which is why some people decide to use the money inappropriately. But that doesn’t mean it’s impossible.

Additionally, it’s crucial to note that private student loans may have different rules. With those, each lender can decide what is and isn’t permitted, so you might legally be in the clear to take the funds to pay off other debts. If you’re considering it, review your agreement to find out whether it’s allowed.

Have you considered using student loans to pay off credit card debt? If so, did you go through with it? Why or why not? Share your thoughts in the comments below.

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Tamila McDonald

Tamila McDonald is the Chief Operations Officer at District Media, Inc. A U.S. Army veteran with 20 years of distinguished service—including five years as a military financial advisor. Tamila is a former AFCPE-certified personal financial counselor who spent eight years post-retirement guiding wounded warriors and families on budgeting, VA benefits, and long-term planning, bringing more than 15 years of specialized writing and content leadership in personal finance and HR topics to ensure District Media delivers trustworthy, experience-backed guidance.