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After attending college, you might have a hefty student loan you need to pay off, and you might also have some credit card debt you’re ready to eliminate.
Having two (or more) separate payments each month can get messy, and could negatively impact your credit if you don’t make all the minimum payments required. You may be wondering if it’s possible to consolidate student loans and credit card debt together to make things easier.
In this guide, we’ll look at the differences between debt consolidation and student loan consolidation, plus explore the options to lower your interest rates and possibly get one single payment for all your student loan and credit card debts.
Key Points
• Debt consolidation and refinancing serve different purposes in managing multiple debts like student loans and credit cards.
• Direct Consolidation Loans are available only for federal student loans.
• Personal loans can consolidate various debts, but borrowers with federal student loans will forfeit federal benefits.
• Balance transfer credit cards offer a 0% interest rate for a limited time, but may be difficult to pay off in the short time frame if you have a large amount of debt.
• The Avalanche and Snowball methods provide alternative debt repayment strategies.
What Is Debt Consolidation?
There are two different ways you can change what your debt looks like: debt consolidation and debt refinancing.
It’s important to understand that when it comes to student loans, consolidating is different from refinancing. Refinancing refers to changing the financial terms of a debt. Maybe when you took out your student loan, for example, interest rates were higher than they are now. You might be able to refinance your loan with lower rates or you could refinance to extend the loan term.
Debt consolidation, on the other hand, refers to combining more than one debt into a new loan with a single payment. Say you have three different credit card balances and you take out a new loan to pay them off. Now, those three credit cards have a zero balance and you’re left with a single monthly payment and a new interest rate and terms with the new loan.
Consolidating Student Loans
The U.S. Education Department offers what’s called a Direct Consolidation Loan, which consolidates all your federal education loans that qualify into one new loan with a single interest rate, typically the weighted average of the loans you’re consolidating. When you consolidate federal student loans, you keep federal benefits, such as income-driven repayment plans and student loan forgiveness.
Student loan consolidation may be useful if you have federal loans from different lenders and are making more than one payment per month. However, your interest rate won’t necessarily be lowered, nor will you be allowed to also consolidate private student loans or credit card debt.
Consolidating Credit Cards
Just like with student loans, you may have multiple credit cards each with their own balance, interest rate, and minimum payment due each month. This can make paying off all the debt next to impossible — and make you feel like you’re treading water as you pay the minimum amount due on each card.
With credit card consolidation, you take out a new personal loan and pay off all outstanding credit card debt. You then have one payment and one interest rate (which may often be significantly lower than some very high rates for credit cards). You’re now making one monthly payment for all your credit card debt.
How to Consolidate Student Loans and Credit Card Debts
As discussed, with a Direct Consolidation Loan, you can’t add credit card debt to the loan. Direct Consolidation Loans are reserved for federal student loans only.
However, if you’re wanting to consolidate both student loans and credit card debts, there are options you can consider.
Personal Loan
One way to pay off different types of debt is with a personal loan. However, be aware that personal loans typically have higher interest rates than student loans. The rates for personal loans may be lower than credit card interest rates if your credit is good.
By taking out a personal loan, you may be able to pay off all of your student loans and credit card debt. Your debt is then rolled up into one monthly payment with one interest rate.
The higher your credit score, the lower the interest rate you may qualify for with a personal loan. If you don’t get a good rate, you could extend the loan term to make your payments more manageable. But that will result in paying more in interest over the life of the loan. You can usually pay off a personal loan early without penalty, which can cut down on what you’d otherwise pay in interest.
Finally, it’s important to note that if you use a personal loan to pay off your federal student loans, you’ll lose federal benefits such as student loan forgiveness and deferment.
Balance Transfer
If a personal loan isn’t for you, you could check to see if you have a credit card with a balance transfer offer. Often, credit cards will offer a promotion of 0% on any balances from other credit cards or loans transferred. Take note though: Often these promotions end after a year, and then you’re stuck with the interest payment on the remaining balance.
A balance transfer may make sense if you know you can pay off your debts within a year. If you have a large amount of credit card debt or a high student loan amount, this may not be the best solution if you can’t pay it off quickly. Instead, you might consider transferring only the amount of your debts that you know you can pay off within the timeframe, or consider an alternative method.
Alternatives to Consolidation
If you’re hoping to consolidate student loans and credit card debt together, taking out a personal loan or using a balance transfer are two options to explore.
You might also look at a debt reduction strategy, such as the Avalanche Method or the Snowball Method.
The Avalanche Method
The Avalanche Method focuses on paying off your debts with the highest interest rates first. Once those are paid off, you put your money toward the debts with the next highest interest rates, and so on and so forth, until they are all paid off.
The Snowball Method
With the Snowball Method, you focus on the debt with the largest balance first. Put extra money toward paying that off, then when it’s paid off, you move to the debt with the next largest balance.
Continue Payments
Whatever strategy you choose, the key is to keep making payments on your other debts too. And if possible, pay more than the minimum amount due. Even paying an additional $25 a month on a debt will help you pay it off faster and reduce the total amount of interest you pay overall.
Student Loan Refinance Tips from SoFi
Because student loans are often the largest debts people carry, you may want to have a separate strategy for paying off student loans.
When you refinance student loans, you exchange your old loans for a new private loan, ideally one with a lower interest rate, which could lower your payments. Or you could opt for a loan that offers a longer time period if you want a smaller monthly payment. However, keep in mind that with a longer loan term, you’re likely to pay more in interest over the life of the loan.
Using a student loan refinancing calculator could help you see what you might save by refinancing.
Also, if you plan on using federal benefits like forgiveness or income-driven repayment plans, it’s not recommended to refinance federal student loans with a private lender. Instead, look into a Direct Consolidation Loan or refinance your student loans once you’re no longer using federal benefits.
The Takeaway
While it can be challenging to consolidate student loans and credit card debt together, it may be possible to do so with a personal loan or a credit card balance transfer. Using one of these methods allows you to transfer these debts into a single loan with a single payment and interest rate. However, there are drawbacks to consider, including losing federal protections on federal student loans.
If a personal loan or balance transfer credit card isn’t an option, you could consider refinancing your student loans to possibly lower your interest rate and save money each month. The money you save could then be put toward paying off your credit card debt.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
FAQ
Do I lose my credit cards if I consolidate?
Consolidating credit card debt does not cause you to lose your credit cards. It merely wipes out the debt on each card you include in the consolidation (though you will have a new loan to pay off for all the debt on the consolidated credit cards).
Will consolidating my student loans lower my credit score?
If you use the Direct Consolidation Loan, this will not impact your credit score. However, if you consolidate your student loans with a personal loan or through student loan refinancing, it may impact your credit.
Can my student loans be forgiven if I consolidate?
If you consolidate your loans with a Direct Consolidation Loan, you’re still eligible for student loan forgiveness. However, if you refinance your student loans with a private lender, you are no longer eligible for federal benefits, including loan forgiveness.
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