Can credit cards help with student-loan debt?

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Ask a Lender
June 1, 2017 | Updated September 25, 2017


Key Points

Should you use credit cards to pay down student loans?

  • Balance transfers may be utilized, in which all or part of a student loan is moved to a credit card with a lower interest rate.
  • Due to changes in law, it can be more difficult to obtain a credit card, particularly for recent college graduates without much income.
  • Consolidating or refinancing your federal or private student loans may be a more effective way to reduce debt than a balance transfer.

If you’re a recent college graduate, it may be overwhelming to see the balance on your student-loan statement. For the Class of 2016, the average debt is more than $37,000. Nationally, there are 44 million student-loan borrowers who’ve tallied a total debt of $1.3 trillion.

Federal legislation passed in 2009 has curbed a lot of credit-card debt that college students used to rack up. According to Sallie Mae, the average credit-card balance for an undergraduate student shrank from $3,173 at its peak in 2008 to $925 just five years later. It’s more difficult than ever to obtain a credit card if you’re under 21, as the law requires a co-signer or documentation proving sufficient income to repay debts.

Many people in their 20s and 30s who are saddled with student loans may be tempted to transfer that debt to a zero- or low-interest credit card to save money. They may also be interested in managing their bills more efficiently by consolidating their debts onto a credit card.

Before making the move, it’s important to understand that student loans can be consolidated with other student loans or refinanced into a new student loan. However, they cannot be consolidated with other types of personal debt, whether it’s a credit card, auto loan or personal loan.

However, student-loan balances can be transferred to a credit card. This may or may not be a wise move, depending on your personal situation.

Which debt is better?

Comparing interest rates is a good first step toward deciding your primary debt source. For federal student loans disbursed between July 1, 2016, and July 1, 2017, the rate was 3.76 percent for subsidized and unsubsidized undergraduate loans; 5.31 percent for unsubsidized graduate or professional loans; and 6.31 percent for Direct PLUS Loans, specialized loans that make parents primary or co-signing borrowers. Rates from private lenders vary — Sallie Mae loans, for example, averaged 7.9 percent in 2015 — and may or may not be comparable.

On the surface, transferring thousands of dollars of student-loan debt to a credit card with zero interest is a no-brainer. However, you may run into trouble if you can’t pay off the balance during the introductory period, which typically lasts 12 to 18 months. After that, interest rates may soar to 15 to 20 percent or higher, meaning more of your monthly credit-card payment is going toward interest than if you’d stuck with the student loan. Also, keep in mind that most credit cards will have balance-transfer fees — the average in 2015 was 3 percent of the transfer amount — reducing the amount that can be moved.

Generally speaking, if you have a relatively low student-loan balance that can be completely transferred to a low-interest credit card, and you can pay the entire balance within the introductory period, paying off your student loan first may be the way to go. Otherwise, keeping your student loan and focusing on paying higher-interest credit-card debt is a sound strategy.

Reducing debt

As previously mentioned, the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 helped reign in out-of-control debt for many college students. A key piece of the law bars anyone under 21 from obtaining a credit card unless they have a co-signer or can prove their income is large enough to pay a balance.

Though most college students require a parent to co-sign a credit-card application, you may not be immune to the effects of the CARD Act after you’ve left school. Even if you’re 21 or older, the law requires credit-card applicants to have sufficient income or a qualified co-signer. The lone exception is stay-at-home parents, who need only to prove they have access to sufficient income, often through a partner or spouse.

And even though it’s not possible to consolidate student loans with other types of debt, it is OK to consolidate multiple student loans into one payment plan. Consolidating your student loans could be the best choice for saving money, rather than using a credit-card balance transfer.

With federal student loans, for example, the U.S. Department of Education’s Direct Consolidation Loan program allows separate Perkins, Stafford, PLUS and supplemental loans to be combined into one loan with weighted interest. It’s helpful to use a loan-consolidation calculator to understand what your new interest rate will be, and it’s important to note that loan terms can increase to as much as 30 years.

Consolidating private student loans, or even moving a federal loan into a private consolidation loan, is another option. Many private lenders will offer consolidation perks, such as waiving application, origination or prepayment fees. However, the process does not work in reverse. If you have private loans, you may not move them into a federal consolidation program.

If a balance transfer to a credit card isn’t feasible, refinancing your student loans is another option. Refinancing is different from consolidation because you’ll still have the same number of loans. You’ll simply be trading in an old loan for one that likely has a lower interest rate and longer term.

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