Should You Pay Off Credit Cards or Student Loans First?

By Elaine Rubin

Private student loans offer current rates as low as 5.09% to 14.50%. Click here to find a preferred lender.

Which do I tackle first? There is no easy, one-size-fits-all answer to this one. Simply put, it depends. There are many items to consider when coming up with any debt repayment strategy. You have to be sensitive to both your current budget and your future financial goals. This article will shed some light on the pros and cons of student loan vs. credit card debt, and hopefully help you apply the right repayment strategy for your specific situation.

Let’s examine the two different types of debt, by starting with student loans.

Student Loan Debt

Affordable Interest Rates

Compared to credit cards, student loans carry a much lower interest rate on average. This means if your loan balance is roughly the same as your credit card balance, you’ll pay less total interest over the life of your student loan than you would on your credit card. Making the minimum payment on your student loan while paying that high-interest credit card off quicker can save you money in the long run.

Interest Paid is Tax-Deductible

Student loan debt is something the government sees as an investment in your future. If you meet the qualifications, you may be rewarded with a tax deduction for interest paid (up to $2,500) on your student loan throughout the year.

Student Loans are not Dischargeable in Bankruptcy

Both federal and private student loans are practically impossible to discharge in a bankruptcy proceeding. This means student loan debt is likely to be a part of your life until it is completely paid in full.

Some Student Loans Qualify for Forgiveness

It is true that certain borrowers may qualify for forgiveness programs, such as Public Service Loan Forgiveness which could pardon your remaining student loan debt after 120 monthly, qualifying payments. But did you know that if you were enrolled in a specialized repayment plan, such as Income-Based Repayment, the remaining balance of your qualifying student loans could be forgiven after a period of 20 or 25 years?

Employers May Offer Student Loan Repayment Assistance

It’s unlikely you will find an employer willing to pay your credit card off for you, but a growing number of employers are offering student loan repayment assistance. Check with your HR department to find out if this option exists at your place of employment and what the qualifications may be. You may even want to factor a benefit like this into your job hunt.

Credit Card Debt

A Good Way to Build and Boost Your Credit

Because credit cards are a revolving credit line—and payments are due pretty much immediately upon use—your card issuer begins reporting your payment history to the credit reporting companies (like Experian, Equifax, and TransUnion) right away. This may have already helped you establish and build a solid credit profile faster than any of your student loans. So keeping your credit card in good standing (and preferably paid in full each month) is an excellent long-term play for your FICO® or VantageScore®.

A word of caution: it is better to pay the balance in full and not close your account than to formally close a credit card. Having an open, available line of credit that you don’t use can actually help your credit score.

Late Fees

Missing a payment on a credit card can (and often does) result in late fees. These fees can add up, and sometimes are even more than the minimum payment that was due. Keep this in mind when using plastic to cover expenses.

High Interest Rates

Credit cards tend to have higher interest rates than student loans. According to creditcards.com, the national average interest rate for credit cards is 16.06% (as of 7/25/2017). Interest rates for federal and private student loans tend to be significantly lower.

TIP: If you were thinking of using a credit card to pay for tuition or other school related expenses, check out our article Should I Pay My Tuition With a Credit Card. And remember that private student loans not only offer competitive interest rates, but the funds can be used for more than just tuition. Private student loans can help with housing, transportation, laptops, books, and more. So explore all of your options before you default to using your card.

Repayment Strategies

Set Your Credit Card Bills up on Autopay

If you find yourself in a situation where you are carrying a balance on your credit card (i.e., not paying it off every month) one of the best ways to avoid late fees is to set up an automatic payment for your account. You can always pay more each month if you have the funds, but setting up an automatic payment will help to ensure that you get your bill paid on time each month.

Sign-Up for Auto-Debit for Your Student Loans

Most lenders offer a discount for borrowers who enroll in automatic debit. Discounts generally range from 0.25% to 0.50%. On a balance of any amount, but particularly high student loan balances, these small discounts can add up to big savings.

Pay More Than the Minimum

If you pay only the minimum on any debt, it will take longer to pay off and you will pay more in interest over time. Adding as little as five or ten dollars per month to the minimum due can make a noticeable difference in what you pay in interest over the life of the debt. Not only will you get out of debt quicker, but you will save money doing it. According to Andrew Thrasher, CMT and Portfolio Manager with Financial Enhancement Group, LLC, "You want to make sure at least minimum payments are being met on all debt. If a payment gets missed then even more problems and headaches can occur."

piggy-bank-interest-rate-comparison

Assess Your Debt and Prioritize Repayment

There are a few different ways to approach debt. You may choose to pay off your highest interest rate debt first, putting all your extra available funds toward that debt (while maintaining minimum payments on everything else). This will save you money on the interest you pay overall.

Another popular approach is to pay off your debts from smallest to largest. This can help you eliminate smaller debts altogether, giving you the psychological boost by conquering your debts and crossing them off your list. Once one debt is paid off, take the amount you were paying on that debt and add that to the payment for the next debt on your list. You might not save as much mathematically, but this theory can create a lot of momentum and keep you focused on your goal.

Another option for making debt more manageable is student loan consolidation or private student loan refinance. Check out StudentLoanConsolidator for more information on federal and private student loan consolidation, to see if one of these options is right for you.

Whatever strategy you choose, having a strategy is key to not becoming overwhelmed.

What to do next?

Should I Refinance My Student Loans?

How to Refinance My Student Loans

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¹Rates shown are for the College Ave Undergraduate Loan product and include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. If a payment is returned, you will lose this benefit. Variable rates may increase after consummation.

²This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.

³As certified by your school and less any other financial aid you might receive. Minimum $1,000.

Information advertised valid as of 09/13/2023. Variable interest rates may increase after consummation. Approved interest rate will depend on the creditworthiness of the applicant(s), lowest advertised rates only available to the most creditworthy applicants and require selection of full principal and interest payments with the shortest available loan term.

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We encourage students and families to start with savings, grants, scholarships, and federal student loans to pay for college. Students and families should evaluate all anticipated monthly loan payments, and how much the student expects to earn in the future, before considering a private student loan.

Loans for Undergraduate & Career Training Students are not intended for graduate students and are subject to credit approval, identity verification, signed loan documents, and school certification. Student must attend a participating school. Student or cosigner must meet the age of majority in their state of residence. Students who are not U.S. citizens or U.S. permanent residents must reside in the U.S., attend school in the U.S., apply with a creditworthy cosigner (who must be a U.S. citizen or U.S. permanent resident), and provide an unexpired government-issued photo ID. Requested loan amount must be at least $1,000.

¹Advertised APRs for undergraduate students assume a $10,000 loan to a student who attends school for 4 years and has no prior Sallie Mae-serviced loans. Interest rates for variable rate loans may increase or decrease over the life of the loan based on changes to the 30-day Average Secured Overnight Financing Rate (SOFR) rounded up to the nearest one-eighth of one percent. Advertised variable rates are the starting range of rates and may vary outside of that range over the life of the loan. Interest is charged starting when funds are sent to the school. With the Fixed and Deferred Repayment Options, the interest rate is higher than with the Interest Repayment Option and Unpaid Interest is added to the loan’s Current Principal at the end of the grace/separation period. To receive a 0.25 percentage point interest rate discount, the borrower or cosigner must enroll in auto debit through Sallie Mae. The discount applies only during active repayment for as long as the Current Amount Due or Designated Amount is successfully withdrawn from the authorized bank account each month. It may be suspended during forbearance or deferment.

²In 2022, instant credit decisions were provided to 97.8% of applicants. Other applications typically received credit decisions in 3 to 5 business days.

³Although we do not charge a penalty or fee if you prepay your loan, any prepayment will be applied as outlined in your promissory note-first to Unpaid Fees and costs, then to Unpaid Interest, and then to Current Principal.

⁴Based on the percentage of borrowers who were approved for an undergraduate loan with a cosigner compared to the percentage of borrowers who were approved for an undergraduate loan without a cosigner from October 1, 2021 through September 30, 2022.

⁵ For applications submitted directly to Sallie Mae, loan amount cannot exceed the cost of attendance less financial aid received, as certified by the school. Applications submitted to Sallie Mae through a partner website may be subjected to a lower maximum loan request amount. Miscellaneous personal expenses (such as a laptop) may be included in the cost of attendance for students enrolled at least half-time.

⁶ Examples of typical costs for a $10,000 Smart Option Loan with the most common fixed rate, fixed repayment option, 6-month separation period, and two disbursements: For a borrower with no prior loans and a 4-year in-school period, it works out to a 10.28% fixed APR, 51 payments of $25.00, 119 payments of $182.67 and one payment of $121.71, for a Total Loan Cost of $23,134.44. For a borrower with $20,000 in prior loans and a 2-year in-school period, it works out to a 10.78% fixed APR, 27 payments of $25.00, 179 payments of $132.53 and one payment of $40.35 for a total loan cost of $24,438.22. Loans that are subject to a $50 minimum principal and interest payment may receive a loan term that is less than 10 years.

Information advertised valid as of 08/25/2023.

SALLIE MAE RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS, SERVICES, AND BENEFITS AT ANY TIME WITHOUT NOTICE. CHECK SALLIEMAE.COM FOR THE MOST UP-TO-DATE PRODUCT INFORMATION.

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This information is for graduate and undergraduate students attending participating degree-granting schools. Borrowers must be U.S. citizens or U.S. permanent residents if the school is located outside of the United States. Non-U.S. citizen borrowers who reside in the U.S. are eligible with a creditworthy cosigner (who must be a U.S. citizen or U.S. permanent resident) and are required to provide an unexpired government-issued photo ID to verify identity. Applications are subject to a requested minimum loan amount of $1,000. Current credit and other eligibility criteria apply.

Actual rate and available repayment terms will vary based on your income. Fixed rates range from 4.67% APR to 16.15% APR (excludes 0.25% Auto Pay discount). Variable rates range from 5.64% APR to 16.45% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan origination loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. Although the rate will vary after you are approved, it will never exceed 36% (the maximum allowable for this loan). Please note, Earnest Private Student Loans are not available in Nevada. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account. It is important to note that the 0.25% Auto Pay discount is not available while loan payments are deferred.

¹You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay.

²Nine-month grace period is not available for borrowers who choose our Principal and Interest Repayment plan while in school.

³Earnest does not charge fees for origination, late payments, or prepayments. Florida Stamp Tax: For Florida
residents, Florida documentary stamp tax is required by law, calculated as $0.35 for each $100 (or portion thereof) of the principal loan amount, the amount of which is provided in the Final Disclosure. Lender will add the stamp tax to the principal loan amount. The full amount will be paid directly to the Florida Department of Revenue. Certificate of Registration No. 78-8016373916-1.

⁴Earnest clients may skip one payment every 12 months. Your first request to skip a payment can be made once you’ve made at least 6 months of consecutive on-time payments, and your loan is in good standing. The interest accrued during the skipped month will result in an increase in your remaining minimum payment. The final payoff date on your loan will be extended by the length of the skipped payment periods. Please be aware that a skipped payment does count toward the forbearance limits. Please note that skipping a payment is not guaranteed and is at Earnest’s discretion. Your monthly payment and total loan cost may increase as a result of postponing your payment and extending your term.

The information provided on this page is updated as of 07/20/2023. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.

Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at [email protected], or call 888-601-2801 for more information.

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Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, years of professional experience, income, and a variety of other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Financial Protection and Innovation under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

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