Reader Question: Student Loan to Pay Off Debts?
“Is taking out a student loan and using it to pay off most debts or at least ‘control’ the debts a wise idea in the long run?” - D
First, a technicality: You can’t actually use a student loan for this purpose. Student loans are usually awarded with the stipulation that you use them for school-related expenses only. But, what you can do (and what I assume you’re asking) is get a student loan, and take the out-of-pocket money you were going to use for tuition/books/etc., and pay off/pay down your debts with that.
To know if this is a good idea, you really need to ask yourself some questions first.
How much student debt am I willing to take on?
If it were me, I wouldn’t go this route, because I’m already staring down the barrel of $40,000 in undergraduate debt. But if this loan will still leave you with a “comfortable level” of student debt, you might be alright. The MSN Money article “How much college debt is too much?” can help you calculate how much college debt you can safely take on.
What am I using this money to pay for, exactly?
From your question, I’m guessing you’re looking to pay off credit cards, or possibly a car loan. Either way, some kind of consumer debt. Understand that there’s a difference between these kinds of debts. Namely, a student loan never goes away. Even if you file for bankruptcy. And although a student loan rate may be more favorable, it also has a long repayment term (10-30 years).
Can I stop accumulating debt?
If this is consumer debt, then you will need to stop once you get the loan. Stop carrying a balance on your credit card. Or, if it’s a car loan, then you can’t run out and trade in your car for a new one just because your loan is paid off. If you feel you can exercise the needed amount of restraint, then alright.
How’s my credit?
If you’re getting this student loan through a private institution (a bank rather than the government), and your credit history isn’t very long, you’ll likely need a co-signer on your loan. A co-signer will be on the hook if you don’t pay the loan, so whoever it is needs to know your intentions with this loan.
Alternately, if your credit is good, you have another option. Get a credit card with a 0% intro APR on balance transfers, and move your debt over there. This is really the better option, if your credit is good enough.
Does this seem like a good idea to me?
How you feel about this is actually very important. The fact that you came to me with this question means you’re having doubts. After you think this through, if you’re still doubting it, then it’s probably not a good course of action. After you’ve considered your situation, your gut instinct will help you find your conclusion.
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Remember this too: student loan debt is one of the 5 kinds of debt you can’t get out of by declaring bankruptcy. You have until you pay it off or die (and I’m not actually sure what happens to the debt if you die).
Comment by Don — June 6, 2007 @ 6:39 pm
Don,
Right. And yes, it does go away if you die, also if you become disabled. But that’s it - you have to die, become disabled, or pay it off.
Comment by Stephanie — June 6, 2007 @ 7:42 pm
OK…I’ll take the contra argument here. On the surface the gut says no, but I think you can make the argument the other way, too. For instance, if you are replacing high-interest credit card debt (20+%) with guaranteed rate student loan debt (Stafford capped at 6.8%, Perkins capped at 5%, etc.), then it may not be a bad idea. Of course, it would also mean cutting up the credit cards and not using them again - or you will find yourself in the same situation in another year.
Also, while student loan debt cannot be erased through bankruptcy, the interest you pay can be deductible on your taxes. So, you could be moving non-deductible interest from your credit card and/or car loan to deductible interest from student loans.
In short, I don’t think that there is one RIGHT answer that blanket applies to everyone, but it is good to seek counsel.
Good luck.
Comment by The Travelin' Man — June 7, 2007 @ 10:31 am
if you die and you have a co signer they are responsible… i thought about faking my own death until i found out that my brother would be stuck with my 80k…
Comment by jos — June 7, 2007 @ 11:42 am
LOL @ jos
It seems like a debt consolation. Debt is debt all you are doing it moving it around.
Change your behavior about money so you want slip in debt again
Comment by Moneymonk — June 8, 2007 @ 5:18 pm
[...] Than You answers a reader’s question on using student loan to pay off debts. Good idea? Bad [...]
Pingback by Around the PF Blogosphere: June 8, 2007 | The Sun’s Financial Diary | A Personal Finance Blog on Saving and Investing — June 8, 2007 @ 11:05 pm
Student Loans have lower interest rates. Given similar amount, or maybe more debt, than what you plan to take out on the student loan, it will almost always make more sense, since the debt you are effectively paying off is of higher interest than a student loan’s.
However, since it is rare that you have that much left over in a student loan package after paying for school, I don’t advise this as a method of getting lower interest rates.
Comment by Finance Guy — June 12, 2007 @ 11:56 pm
I think the thing about student loans is that most people are going to be actually be more in debt later so it’s probably wise to take the cheaper debt not instead of borrowing more at higher cost later. This is of course assuming you won’t waste the money…
Comment by dong — June 13, 2007 @ 9:21 pm
Student loan debt is good if you can get college done with because of it. But it is still debt. no mater how you look at it.
I would say get out of debt of all kinks so as to not have to pay intrest. Pay intrest bad keep more of your hard earned money good.
Comment by clint — November 4, 2007 @ 1:00 am
looking back now I should have invested it instead of paying of debt, but with the low intrest rate and the grace period, its appears to be a very smart thing to do. Too bad bankruptcy won;t erase it.
Comment by buy beats — February 13, 2008 @ 12:47 am
A co-signer will be on the hook if you don’t pay the loan, so whoever it is needs to know your intentions with this loan.
Comment by Debt Settlement — April 23, 2008 @ 11:57 am
Diligent savers can use student loans to their advantage. The real answer is: it depends. However as a rule of thumb, the lower the interest rate on your loans, the better off you’ll be just paying the minimum monthly payment and nothing more. Take the extra money you were going to pay on your loan and invest it instead.
Comment by Janni — April 29, 2008 @ 12:33 pm
DON’T GET STUDENT LOANS, EVER, EVER AND EVER…
you will be not only in Debt up to your eyeballs, you will be ASSURED of a life of indebted SLAVERY AND POVERTY till you die,
and its not the loans you take out, its the INTEREST that they COMPOUND AND COMPOUND, until one day, you find you are paying a million for a thousand dollar loan, this is NO JOKE,
its called Predatory Lending, its the biggest CORRUPT SCAM IN THIS NATION, where the wealth ‘ELITES’ in bed with GOVERNMENT
DELIBERATELY have set up a system where their EXTORTED WEALTH
is on the backs of the DUPED WHO WERE STUPID ENOUGH TO BELIEVE THAT EDUCATION = THE AMERICAN DREAM.
COLLEGE IS A TOTAL WASTE OF TIME AND ITS NO GUARANTEE THAT YOU’LL BE BETTER OFF, and in FACT,
STATISTICALLY, unless you are from wealthy family OR ARE A MINORITY, [who can get the scholarships/jobs, etc], you are most likely to find yourself lower class-to lower middle class, and IF you went to school as low income student,
believe me, you’ll STILL be low income [guaranteed if you are single mother or have kids while attending college],
AND WORSE OFF, AFTER COLLEGE.
if i had to do it all over again,
I WOULD HAVE STAYED ON WELFARE, SOLD DRUGS, AND DONE WHATEVER CRIME THERE WAS TO GET OUT OF POVERTY,
I MAY HAVE DONE TIME IN PRISON, BUT THAT TIME, WOULD BE FAR LESS AND MY KIDS BETTER OFF, BY TIME I GOT OUT,
THAN THEY ARE NOW, AND THERE IS NO WAY, NO WAY OUT…
I MAKE LESS MONEY NOW, WITH COLLEGE…THAN I DID WHEN HOMELESS AND ON WELFARE AND BTW, I WAS WORKING WHEN HOMELESS AND ON WELFARE…
THE MOST STUPID IDIOTIC THING I EVER DID,
WAS GO TO COLLEGE THINKING IT WOULD MAKE A DIFFERENCE…IT DID ALRIGHT,
IT ENSNARED ME INTO A LIFE OF BONDAGE AND POVERTY AND, A LIFE OF DEPENDENCY ON WELFARE [UNLESS I WORK UNDER GRID AND SELL DRUGS OR GET INTO TERRORISM AND BELIEVE ME, THE THOUGHT HAS CROSSED MY MIND],
ITS NOT WORTH IT. LEARN TO DO WITHOUT,
IN AMERICA…THE DREAM IS AN ILLUSION…THERE ARE EXCEPTIONS, THEY ARE VERY RARE,
its CAPITAL BABY AND IF YOU DON’T HAVE IT OR DON’T HAVE THE MEANS TO EXTORT TO HOARD WEALTH [LIKE SALLIE MAE, ET. AL DO]
FORGET IT…
BETTER OFF POOR,
THAN POOR AND ENSLAVED TO UNCLE SAM.
NO TO STUDENT LOANS…UNLESS YOU ARE ONLY 18 AND NO FAMILY…FORGET IT,
NONTRADITIONAL STUDENTS, RUN, RUN AS FAST AS YOU CAN AWAY FROM COLLEGE,
YOU’D BE BETTER OFF DEALING METH.
THATS PATHETIC YES,
BUT ITS THE DAMN TRUTH. WELCOME TO CAPITALISM.
Comment by Tasha — May 4, 2008 @ 12:04 am
Student loan consolidation rebate rebates are usually given by a private company when student loans are consolidated equaling more than $20,000. The more student loans consolidation, the higher the student loan consolidation rebate. This is usually a percentage of the principal loan balance that is either applied to the outstanding loan or sent to the borrower as a cash payment. This can be a very attractive offer, especially when in the form of a cash payment to the borrower.
Comment by wanieda — July 23, 2008 @ 1:33 pm
Student loan consolidation can have many benefits for the career minded student. With the prices of things going through the roof, going to college can be very costly. Many students don’t have thousands of dollars to pay their way through college.
Comment by shahadin — October 10, 2008 @ 9:51 am
“You can’t actually use a student loan for this purpose. Student loans are usually awarded with the stipulation that you use them for school-related expenses only”
HA what a load of balls. i spent my student loan on drinks, xbox games, cds and dvds. it never ONCE went on a school book. so the REAL answer is:
YES you can use your student loan to pay off other debts. but its probably a better idea to try the bank.
Comment by kom — November 17, 2008 @ 3:01 am