In today’s busy world, who wouldn’t jump at the chance to make debt repayment simpler and easier? And that’s not even touching on how debt consolidation can lower your interest rates, too. All in all, it sounds like a pretty good deal when you phrase it like that — and for credit cards it often is.
But what about borrowers with a mix of debt types, like credit cards and student loans? After all, Americans collectively hold more than $1.7 trillion in student loans, a figure that’s increased over 100 percent in the last decade.
Is it possible to combine student loan credit card debt consolidation? Yes, sometimes. But is it always advantageous to do so? Not necessarily.
Here are some considerations to keep in mind about consolidating student loans along with other balances.
Limitations on Using Personal Loans for Student Debt
One popular debt consolidation strategy is to use a personal loan to cover other types of debts, typically credit cards. The goal here is to reduce interest rates and simplify payments, essentially turning multiple payments into just one per month.
What if you have both credit card balances and student loan balances you want to address? Some lenders do not specify how you are or are not allowed to use a personal loan. However, many lenders stipulate that borrowers are not allowed to use personal loan funds to pay off student loans, according to NerdWallet. Why? Because educational loans must meet special criteria on a legal, federal level — and many personal loans do not meet these requirements.
Furthermore, student loans on average tend to have lower interest rates than even many personal loans — which means going this route may actually end up costing you more money in the long run.
Options for Refinancing Student Loans
Borrowers can oftentimes consolidate their federal loans into a single Direct Consolidation Loan. If you qualify, doing this can yield many of the same benefits as traditional consolidation via a personal loan, like easier bookkeeping, a fixed interest rate and potentially lower monthly payments. As with any approach to consolidating or otherwise changing the format of your loans, considering the pros — like lowered monthly payments — and the cons — like potentially having to pay back loans for a longer period of time — is very prudent before you decide to bundle.
Another consolidation option specifically meant for student loans is refinancing them. The stronger your credit score, the more likely you are to qualify for the most competitive loans with the lowest interest rates. You’ll usually also need to demonstrate a steady stream of income and a reasonable debt-to-income ratio to qualify for the top offerings.
The most promising candidates for refinancing are private student loans with high interest rates. Be aware that if you do consolidate multiple loans with a private lender, you’ll lose the federal protections on them. Examples include more lenient deferment and forbearance options, as well as Public Service Loan forgiveness.
While it may be possible in some cases to consolidate student loans along with other debts, like credit cards, personal loan lenders often prohibit this usage of borrowed funds. Even if it would be possible to devote personal loan funding toward student loans, the interest rate often turns out to be higher on the new loan than the originals.
What’s more common, and usually more beneficial to the borrower, is to pursue a designated strategy meant specifically to address student loans — like Direct Loan Consolidation (for federal loans) or private refinancing for higher-interest loans. Exploring all these options can help you make the choice that saves you the most hassle and expense.