Why You Shouldn’t Consolidate Student Loans With Credit Card Debt

Ben Luthi

When you consolidate loan balances, you combine multiple debts into one new one. And consolidating debt can be a great way to simplify your financial situation and even potentially save money.

In some cases, mixing debt in consolidation isn’t necessarily a bad thing. But things can get tricky with student loans.

So if you’ve ever asked yourself if you can consolidate student loans with credit card debt or, more importantly, should you consolidate student loans with credit card debt, here are some answers.

How consolidating student loans with credit card debt works

If you’re thinking about refinancing your student loans, you’ll typically do it with a private student loan company. These refinance loans are designed only to consolidate student loan debt, so it’s impossible to add in your credit card balances.

However, you can technically consolidate both student loan and credit card debt together with a personal loan. This is because most personal loan companies typically don’t have any restrictions on what you can use your loan funds for, as long as it’s legal.

Of course, some lenders may prohibit you from using a personal loan for education-related purposes, which includes consolidating student loan debt, but most don’t. So you’d simply apply for a personal loan big enough to cover both your student loan and credit card balances, and use that money to pay them off.

Why consolidating student loans with credit card debt isn’t an effective strategy

Combining your student loans with your credit card debt may simplify your finances a little — instead of having multiple monthly payments, you’ll just have one. However, while it may be a good idea to use a personal loan to consolidate credit card debt, it’s not an effective way to refinance student loans. Here’s why.

  • Interest rates are usually higher: According to the Federal Reserve, the average two-year personal loan interest rate is 9.63%, and loans with longer terms typically carry higher interest rates. On the other hand, you can find student loan refinance lenders offering single-digit interest rates on loans with up to 20-year repayment plans.
  • Short repayment terms: If you’re refinancing your student loans with a private student loan company, you’ll typically have the option to choose a term between five and 20 years, which gives you not only flexibility but also an affordable monthly payment. With major personal loan companies, however, repayment terms max out at seven years, which can increase your monthly payment and put a strain on your budget.
  • Lost tax benefits: As a student loan borrower, you can deduct up to $2,500 in student loan interest you pay every year on your tax return. On the flip side, personal loan interest is not deductible at all, so you could potentially lose hundreds of dollars every year in tax benefits.

When to consolidate student loans

Consolidating your student loans through refinancing can be a great way to save money and time paying them off if you can qualify for a lower interest rate than what you’re currently paying on your debt. It can also give you more flexibility with your monthly payments to have greater control over your monthly payment.

The best time to consider a refinance is if you have a strong credit history and relatively high income, or you have a cosigner with these traits who is willing to apply with you.

Before you apply, though, it’s important to keep in mind that there are both pros and cons to student loan refinancing. Here’s what you need to know:

Pros of student loan refinancing

  • Save money on interest: If you qualify for a lower interest rate, it could help you save significantly on interest charges month-to-month and over the life of your new loan.
  • Get a lower monthly payment: If you can get a lower interest rate, that could automatically result in a lower payment. You’ll also have the chance to get a lower payment by extending your repayment term beyond your current one — though keep in mind that if you go this route, you’ll end up paying more in interest over time.
  • Choose your lender: If you have federal student loans, you didn’t get to choose the company that services your loans. However, with refinancing, you get to compare several lenders and choose the one that works best for you.

Cons of student loan refinancing

  • You may need a cosigner: Not everyone is eligible for student loan refinancing on their own. Even if you can qualify, you may still need a creditworthy cosigner to get a low enough rate to make refinancing worthwhile. Because cosigning can impact a person’s credit, however, it may not be easy to find someone willing to help.
  • You’ll lose federal benefits: If you have federal student loans, refinancing them with a private lender will cause you to lose access to the benefits the U.S. Department of Education provides. That includes loan forgiveness programs, income-driven repayment plans, excellent forbearance and deferment options, and more.

Should you refinance your student loans?

As with any financial decision, it’s important to consider both the advantages and disadvantages of refinancing student debt. If you have federal loans and are taking advantage of some of the benefits they offer, refinancing may not be the best option for you unless you’re confident you can go without those benefits.

It also may not be worth it if you can’t qualify for a lower interest rate than what you’re currently paying, even with a cosigner.

However, if your credit and income situation is strong enough that you can qualify on your own or you have a cosigner who can help you score a low rate — even if it’s just 1% — refinancing could save you money and potentially help you pay off your debt faster.

If you’re thinking about refinancing, make sure to use the Purefy Compare Rates tool to shop around. This tool takes some basic information about you and your student loans and provides rate quotes from multiple lenders in one place, simplifying the rate-shopping process.

Whether or not you choose to refinance your student loans, though, it’s crucial to avoid combining student loan and credit card debt in your efforts to become debt-free as it typically isn’t a sound financial strategy.

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