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geek27

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Should I pay my out of control credit cards with a private student loan?
Hi,

I am college student majoring in electrical engineering and I will be graduating with my bachelors next May. My prospects for employment are pretty good as I’ve had good internships and a 3.9 GPA. I am mentioning this because I am really temped in taking out a student loan to pay for my credit cards and defer my payments till graduation when I can actually make the payments. I have a total of 4 credit cards with a total balance of around $5K and I am struggling to make the minimum payments of all four (please don’t lecture me on taking out so many credit cards, I know that was really dumb). I tried applying for yet another credit card that I could transfer my balance to, but I was not approved. Since I have all my tuition covered (and more for books and stuff), I haven’t taken out any student loans and if I do so this fall, that money would get refunded to me and I could use it to pay for my credit cards. I know paying debt with debt sounds ridiculous, but letting my credit card balance sit there for at least another year while ruining my credit score, which is already very bad (532), sounds worse. Has anyone done so and if so, would you recommend me to do it? The loan would have to come from a private bank (most likely Discover) and I would need a cosigner, not sure if that information is useful.
Thanks you,

Very desperate college kid.

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It can be a slippery slope. 

It may be in violation of your student loan agreement

Student loans are meant to pay for your tuition and fees, as well as the other expenses of attending college. This may include necessary living expenses — like transportation, room and board, and miscellaneous personal expenses. And while personal expenses can be defined differently for different people, the vacations or bar tabs you ran up on your credit card probably wouldn’t count by most people’s definitions. Therefore, you aren’t supposed to use this money to pay off your credit card.

Understand that these rules aren’t well enforced, so you can likely pay off your credit card with student loans without consequences. However, it’s important to know that this may be a violation of your student loan agreement and you could be pursued by your loan facilitator for incorrect loan usage.

Student loans aren’t eligible for bankruptcy

Unlike credit card debt, student loan debt isn’t eligible for bankruptcy (in almost all cases). That means if you stay unemployed or underemployed for an extended amount of time after graduation, your options for reducing your debt will be limited. Of course, you can defer these loans until you’re making adequate income, but this won’t stop the onslaught of student loan interest from accumulating on a balance that just keeps growing every month.

Moving debt isn’t the same thing as paying off debt

Mathematically, it makes sense to move debt from high-interest financing to low-interest financing. And the Nerds love math! However, it doesn’t make sense mathematically to put off paying off debt and let the interest accumulate for years to come without the option of bankruptcy for those in a really tight spot. But there’s also the chance you’ll pay your loans off right away and that low interest will save you cash! Let’s examine two scenarios.

Scenario #1: Your student loan balance is low and you get a job directly after college and pay off your loans within a year. In this scenario, you’ll come out ahead by paying off credit card debt with student loans.

Scenario #2: You paid off your credit card debt with student loans and then ran up more consumer debt. After all, you can just use excess student loans to pay it off and deal with the loans later. Then you don’t get a job in your field after graduation and you end up underemployed making minimum wage. In this scenario, you’re likely unable to make the minimum payments on your loans, which are much higher because you used the excess loans to pay off your credit card debt.

So you see there’s a level of risk here. If you’re comfortable with it, just keep in mind that you can’t declare bankruptcy on student loan debt, and check your agreement to make sure your payments are legal. If you’re risk averse, don’t pay off your credit card debt with student loans.

Tough love coming your way: You have to pay off your consumer debt eventually — putting it off doesn’t change that fact. If you want or need some interest relief, it’s a better idea to get a balance transfer credit card and pay it off before the 0% introductory period ends. If you’re struggling to pay off your debt — no matter the interest rate — you need to increase your income and/or decrease your expenses.

Bottom line: Though it typically comes with a lower interest rate, using a student loan to pay off your credit card debt may not be the best idea. It could be a violation of your loan agreement, student loans aren’t bankruptable, and moving debt from one place to another isn’t the same thing as making real progress. If you’re having trouble paying off your credit card debt, consider a balance transfer card while also increasing the gap between your income and expenses by making more and/or spending less.

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I've replied to your post with a lengthy reply, but Credit Karma has to approve it before posting. Another avenue you might try is contacting all the credit card companies and see if they'll reduce the interest rates to 4% or 6% on the closed credit lines to make manageable payments. If they won't work with you, you can contact a credit counseling service to act on your behalf.  I did that years ago with Lexington Law when I had massive credit card debt and the lenders refused to work with me. They negotiated 4% and 6% interest rates on my cards.

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