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Credit Cards vs. Student Loans

Some students may be nervous about borrowing student loans for the first time, and may look to credit cards as an alternative to help with personal and educational expenses while they are in college. Since both options are a form of borrowing, it is important to understand how each work in order to make the best financial decision for yourself. Below is a comparison chart between credit cards and student loans:

 

Credit Cards

Federal Student Loans

Interest Rates

Credit cards typically carry higher interest rates than student loans, and can often exceed 20%.

Federal student loan interest usually falls below 10%.

Some students may qualify for federal subsidized loans, where the loan is interest-free while the student is in school.

 

Debt Management

Credit card balances are revolving (credit that is automatically renewed as debts are paid off) and can grow until you reach your credit card limit, unless you are paying your full balance off every month. With higher interest rates, it takes longer and costs more to pay off credit card debt as your balance continues to increase.

 

Student loans are non-revolving and are considered installment loans – this means you have a fixed balance for your loans and pay it off in monthly payments over time until the balance is zero.

Repayment terms and options

Credit cards require immediate minimum payments, which is usually paying off the interest you accrued the previous month on the principal balance. This allows the interest to continue to grow and do not help to pay your balance off faster.

 

There are no repayment plans based on your income, ability to pay, or financial hardship, and payments cannot be skipped or deferred without significant penalties.

You do not need to make any payments on federal or most private student loans while you are enrolled at least half-time in school. 

Federal loans also offer repayment plans that determine your monthly payment amount based on your income.

There is no penalty for early repayment of your federal student loans. 

Additionally, if you are unable to make payments due to special or unusual circumstances, your lender may work with you to help alleviate payments.

 

Refinancing Options

There are no refinancing options for credit cards. However, some may take advantage of balance transfers that offer lower interest rates. This can be a helpful option in paying off debt, but can also lead to habits that may increase your overall debt as well.

 

Student loans can be refinanced at a lower interest rate later on if you have good credit.

 

Depending on your situation, it may not always be the best option to refinance any federal loans. Be sure to do your research before making this decision.

Example

Credit card balance: $10,000

Interest: 20% APR

Total cost in interest when paying the minimum due: $13,191 as you’ll be paying $193/mo. in interest.

Student loan (unsubsidized) balance: $10,000

Interest: 5% APR

Total cost in interest when paying the minimum due: $5,430.

 

You may also choose to pay interest while you are in school in order to save even more in the long run.

Return on Investment

Credit cards are often used towards everyday purchases like restaurants, vacations, shopping, and other stuff that might offer instant gratification at the time of purchase, but may not lead to long-term happiness.

Student loans may be used toward cost of attendance items such as books, supplies, personal expenses, and living expenses. When you graduate from college with student loans, you have a college degree on hand that can ultimately lead to better paying job opportunities.

 

Although some students are averse to accumulating debt, if managed correctly and thoughtfully, borrowing a federal student loan can help establish credit. The sooner you can start building credit, the better. Contact your financial aid counselor to discuss your options and what would work best for you.