Using Student Loans to Bail Out of Credit Card Debt

If you’re one of the thousands of college students who signed up for student credit cards to get access to emergency funds or just some extra cash to get through those college days, you might be carrying a high balance and racking up interest charges sooner than you think.

Student credit cards offer several benefits when you’re on a tight budget and need access to extra money, but it’s easy to fall into the ‘credit card habit’ and start depending on your Citi student card or Discover Card to manage your monthly expenses.

If you’re living beyond your means and relying on credit cards to get you by, you will probably leave college deeply in debt, making it harder to get ahead financially as you jump into your new career.

The Danger of Using Student Loans to Manage Credit Card Debt

If you have access to student loans that you might not need, it may be tempting to take out the loan and use the funds to pay off other expenses. As simple as this strategy sounds, there are several risks and drawbacks involved.

First, Sallie Mae and the Federal PLUS loan program specifically state that student loan funds must be used toward school and education-related expenses. You can pay for books, supplies, living expenses and tuition with this money, but personal credit cards don’t make the list.

Secondly, the IRS may see the student loan expenditure as a violation of terms. When it’s time to report your student loan interest deduction on your tax return, the IRS has clearly defined what ‘qualified student loans’ and ‘qualified education expenses’ are, indicating that “Your student loan must have been taken out solely to pay qualified education expenses.”

Other Ways to Pay Down Credit Card Debt During College

If you have access to student loans that you might not need, it may be tempting to take out the loan and use the funds to pay off other expenses. As simple as this strategy sounds, there are several risks and drawbacks involved.

If you find yourself stuck in a trap of paying minimum payments and seeing those credit card balances hit record levels, there are several ways to pay down your debts and get back into good financial standing.

Some students take on a part-time job during college to pay down debt and maintain a healthy cash flow to cover expenses; others choose to take out a personal loan for extra money and pay down the high-interest cards over a few months. You can also:

  • Consolidate credit cards and transfer balances to a lower-interest card
  • Stop using credit cards for daily expenses
  • Sell personal clothing or other assets to make some quick cash and pay off large balances
  • Get a personal loan from friends or family members and pay it back at a lower interest rate

The Bottom Line

Using student loan money to pay off credit card debt may not be your best strategy for managing your finances and getting your debts under control. Consider alternative ways to pay off student credit cards and take the steps to stop credit card spending completely so that you can live within your means and get out of college with as little debt as possible.

Sabah Karimi