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Student loans are meant to help college students and their parents afford the cost of a college education. But it's natural to wonder if you can use the funds for other purposes, such as paying off credit card debt.
It's generally not a good idea to use student loans to pay off credit card debt. Doing so could cause you to take out more student loans, and end up costing you more in the long run. It also changes the nature of your debt, which can create other financial headaches.
Additionally, doing so could violate your loan agreement, which typically sets limits on how you're allowed to use student loan money. Here's what you should know before you consider using student loans to pay off credit cards.
Check Your Student Loan Agreement
According to the U.S. Department of Education, federal student loan funds must be used to pay educational expenses. These costs include:
- Tuition and fees
- Room and board
- Computers and other supplies and equipment
- Transportation to and from school
- Child care expenses
If you use a credit card to pay any of those expenses, you could use your student loan money to pay off the purchases. But if you're applying student loan money to your credit card balance as a general payment, you'll most likely end up paying for other, non-qualified expenses.
With private student loans, the terms for how you can use your money can vary from lender to lender. You'll want to check your loan agreement for details before using private loan funds to pay for other expenses. In general, though, you can expect the list of expenses that private lenders allow to be similar to what the federal government provides.
Bankruptcy Is Unlikely to Wipe Out Student Loans
Another reason to avoid using your student loans to pay off credit card debt is that it can be difficult to have student loan debt discharged by bankruptcy. It's possible, but you'll have to prove to a court that the student loans are causing you significant financial difficulty, which can be a tough hurdle to clear even if your student loan payments are costly.
Credit card debt, on the other hand, is a dischargeable debt in bankruptcy. So even if you don't anticipate having issues with paying your debts in the future, it's a good idea to avoid putting yourself in a position you may regret later.
Keep in mind, however, that you should only ever consider filing bankruptcy as a last-resort course of action after you've exhausted all debt repayment strategies, payment accommodations and forgiveness options.
It Could Put More Pressure on Your Budget Later
One of the reasons you may be tempted to use student loan money to pay off credit card debt is that you may have the option to defer your student loan payments until after you're done with school. Student loans also typically carry lower interest rates than credit cards.
But if you add your credit card debt on top of the debt you're incurring for school, it could make your student loan payments unaffordable after you graduate, putting you in a difficult position. There are some options to lower your student loan payment, but most of them include paying more interest over time.
How to Pay Off Credit Card Debt Without Using Your Student Loans
If you're struggling with credit card debt as a college student, here are some ways you can approach the debt without using your student loan money.
- Stop using your cards. Paying off debt is made more challenging if you're continuing to add more to the balance every month—it can feel like you're taking two steps forward and one step back. To ease things along, put a hold on using your credit cards until you can get a handle on the balance. Think about creating a budget to help make sure all your expenses can be covered without the need for debt.
- Increase your income. Making money as a college student can be challenging. But taking on a part-time job or starting a side hustle as a tutor or freelancer can free up money in your budget you can put toward your credit card debt.
- Pay off high-interest cards first. If you have multiple credit cards, there are a few different approaches you can take with paying them off. If your goal is to save the most money over time, prioritize paying off the balances with the highest interest rates first. To accelerate the process, use the debt avalanche method to make just the minimum payment on all of your cards except for the one with the highest rate. Apply all your extra payments to that card until it's paid in full. Then take what you were paying toward that card and apply it to the one with the next-highest rate, and so on until all of your cards are paid in full.
Paying off credit card debt may not happen overnight. But as you're proactive about decreasing your spending, increasing your income and prioritizing high-cost balances, you'll be able to speed up the process and save money on interest charges while you're at it.
Monitor Your Credit as You Pay Down Debt
Your credit score is an important indicator of your overall credit health, and building a good or excellent credit score can help you qualify for better credit cards and loans with lower interest rates in the future.
As you pay down your credit card debt, it's crucial to avoid missing any payments. If you're late on a bill by 30 days or more, the card issuer will typically report it to the credit bureaus, and your credit score may drop significantly.
In addition to paying on time every month, make sure to monitor your credit to understand how your actions are affecting your score, and whether there are other areas you can address to improve it.
With Experian's free credit monitoring tool, you'll get free access to your Experian credit report and your FICO® Score☉ powered by Experian data. You'll also get real-time updates about certain changes to your report, including new inquiries, new accounts and changes to your personal information.
As you work to pay down debt and continue to practice good credit habits, you'll be able to build your credit history and put yourself in a better position to get affordable financing in the future when you need it.