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Should I Pay Off My Credit Card Debt With Excess Student Loans?

Sept. 12, 2014
Credit Cards
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If you’re a college student on a tight income, you know that every penny counts, and freeing up cash is paramount. As such, you may be tempted to end your stint on the credit card minimum payment hamster wheel by paying off your consumer debt with excess student loans. But before you do, read on for the potential issues with this plan.

It may be in violation of your student loan agreement

Student loans are meant to pay for your tuition and fees, as well as the other expenses of attending college. This may include necessary living expenses — like transportation, room and board, and miscellaneous personal expenses. And while personal expenses can be defined differently for different people, the vacations or bar tabs you ran up on your credit card probably wouldn’t count by most people’s definitions. Therefore, you aren’t supposed to use this money to pay off your credit card.

Understand that these rules aren’t well enforced, so you can likely pay off your credit card with student loans without consequences. However, it’s important to know that this may be a violation of your student loan agreement and you could be pursued by your loan facilitator for incorrect loan usage.

Student loans aren’t eligible for bankruptcy

Unlike credit card debt, student loan debt isn’t eligible for bankruptcy (in almost all cases). That means if you stay unemployed or underemployed for an extended amount of time after graduation, your options for reducing your debt will be limited. Of course, you can defer these loans until you’re making adequate income, but this won’t stop the onslaught of student loan interest from accumulating on a balance that just keeps growing every month. The government offers various repayment options for borrowers who are struggling to keep up with payments, so make sure you are on the plan that best suits your budget.

[Read more: Pick the Best Student Loan Repayment Plan in 3 Simple Steps]

Moving debt isn’t the same thing as paying off debt

Mathematically, it makes sense to move debt from high-interest financing to low-interest financing. And the Nerds love math! However, it doesn’t make sense mathematically to put off paying off debt and let the interest accumulate for years to come without the option of bankruptcy for those in a really tight spot. But there’s also the chance you’ll pay your loans off right away and that low interest will save you cash! Let’s examine two scenarios.

Scenario #1: Your student loan balance is low and you get a job directly after college and pay off your loans within a year. In this scenario, you’ll come out ahead by paying off credit card debt with student loans.

Scenario #2: You paid off your credit card debt with student loans and then ran up more consumer debt. After all, you can just use excess student loans to pay it off and deal with the loans later. Then you don’t get a job in your field after graduation and you end up underemployed making minimum wage. In this scenario, you’re likely unable to make the minimum payments on your loans, which are much higher because you used the excess loans to pay off your credit card debt.

So you see there’s a level of risk here. If you’re comfortable with it, just keep in mind that you can’t declare bankruptcy on student loan debt, and check your agreement to make sure your payments are legal. If you’re risk averse, don’t pay off your credit card debt with student loans.

Tough love coming your way: You have to pay off your consumer debt eventually — putting it off doesn’t change that fact. If you want or need some interest relief, it’s a better idea to get a balance transfer credit card and pay it off before the 0% introductory period ends. If you’re struggling to pay off your debt — no matter the interest rate — you need to increase your income and/or decrease your expenses.

Bottom line: Though it typically comes with a lower interest rate, using a student loan to pay off your credit card debt may not be the best idea. It could be a violation of your loan agreement, student loans aren’t bankruptable, and moving debt from one place to another isn’t the same thing as making real progress. If you’re having trouble paying off your credit card debt, consider a balance transfer card while also increasing the gap between your income and expenses by making more and/or spending less.

Coins with graduation cap image via Shutterstock