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Which Debt to Pay Off First: Student Loan or Credit Card

June 04, 2019 · 5 minute read

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Which Debt to Pay Off First: Student Loan or Credit Card

Not all debt is created equal. When juggling multiple debts, such as student loans and credit card debt, it can be important to prioritize paying off some faster than others. Here’s a look at how to consider student debt versus credit card debt, and how to know which demands your attention first.

Prioritizing Your Debts

In general, you may want to prioritize paying off the debts that carry the highest interest rates first. The higher the interest rate, and the longer you hold the debt, the more you end up paying over the life of the loan. Directing extra money to high-interest debts can help you pay them off faster and potentially pay less in interest.

That said, prioritizing one debt over another does not mean that you stop paying off either of those bills. It’s important to stay on top of both debts, making at least minimum monthly payments on each.

Failing to make bill payments can hurt your credit score, which can have all sorts of effects down the road. For example, a poor credit score can make it difficult to secure new loans at low rates when you want to buy a new car, a house, or take out a business loan.

You could even consider setting up automatic payments on your loans. Automatic payments could help you make sure the bills are paid on time and make juggling them easier.

If you’re having trouble making your monthly payments, you might consider strategies such as refinancing to make your payments more manageable.

The Case for Paying Down Credit Cards First

The average credit card annual percentage rate (APR) is about 17%. Everyone’s situation is different, but if you are carrying high-interest credit card debt, you’ll likely want to focus on paying your credit cards off first.

When you sign up for a credit card, you’ll notice that your contract includes an annual percentage rate or APR. This number represents the approximate percent interest and fees that you’ll pay over a year. Most credit cards have an APR that hovers between 15% and 20% .

Let’s compare that to federal student loans. Between July 2018 and July 2019 undergraduate Direct subsidized student loans carried an interest rate of 5.05%. The highest rate you would pay for a federal student loan was 7.6% for Direct PLUS loans—which is still significantly lower than the average credit card rate.

Credit card debt can add up quickly, and the higher the interest rate, the faster your debt can accumulate. Even if you’re making minimum payments, you’ll still accrue interest on your balance if you don’t pay your full statement balance at the end of each billing cycle. And as your interest compounds (as you pay interest on your interest), your balance can get more difficult to pay off.

Also, even if you’re making regular credit card payments, a high balance can still hurt your credit score, which is partially determined by how much outstanding debt you owe.

Paying Off Credit Card Debt

Once you’ve decided to focus on paying off your credit card debt, it’s time to start directing extra funds to the cause. You could look for places in your budget where you can cut costs, and direct any extra savings you find to paying down debt. Consider using bonuses, tax returns, or gifts of cash to help the effort.

If you have multiple credit cards, you may choose to use a couple of strategies to help you pay them off. You may consider going back to the first rule of prioritizing debt and tackle the highest rate first. Make a list of your credit card balances in order of highest interest rate to lowest.

Paying off the credit card with the highest interest rate first, and then taking on the credit card with the next highest rate, is the debt avalanche method. Again, focusing on one debt doesn’t mean you can put off the others.

Don’t forget to make minimum payments on your other cards while you put extra efforts into one individual card.

You may also choose to use a debt snowball strategy. When using this method, order your credit cards from smallest to largest balance. You’d pay off the card with the smallest balance first. Once you do, you’d move on to the card with the next smallest balance, adding the payment from the card you’ve paid off to the payment you’re already making on that card. The idea here is that, like a snowball rolling down a hill getting bigger and faster as it rolls, the momentum of paying off debt in this way can help you stay motivated and pay it off quicker.

If you’re juggling multiple credit cards and finding it overwhelming, you may consider taking out a personal loan and paying off all of your cards at once. Consolidating your debt in this way means that you’ll only have one bill to focus on, so it can be much easier to keep track of your debt. Also, personal loans often come with a lower interest rate than credit cards, so you’ll possibly be saving money in the long run.

Managing Your Student Loans

As mentioned above, it’s important that you continue making regular student loan payments while you’re prioritizing your credit card debt. For one thing, you shouldn’t just stop paying.

If you do, federal student loans go into default after 270 days. After that, your loans can go to a collections agency, which may charge additional fees for recouping your debt. They can also ask the government to garnish your wages or your tax return to make debt payments. So in general, you’re stuck with your federal student loans.

You can, however, typically adjust your student loan repayment plan to make monthly payments more manageable. If you have federal loans, you could consider income-driven repayment plans, which base your monthly payments off your discretionary income. While this may reduce your monthly student loan payments, it extends your loan term to 20 to 25 years, which could end up costing you more in interest payments. So make sure the extra interest payments don’t outweigh the benefits of paying down your credit card debt first.

It may also be a smart idea to refinance your student loans. When you refinance a loan or multiple loans, a lender pays off your current loans and provides you with a new one, hopefully at a lower rate. You can use refinancing to serve a couple of purposes.

One option is that through refinancing you lower your monthly payment by lengthening the loan term. This can free up some room in your budget, making it easier to stay on top of your monthly payments and potentially free up room in your budget to redirect to credit card payments. But keep in mind that lengthening the loan term may result in you paying more interest over the course of your loan.

When you refinance, you can also shorten your loan term. This could be a good way to kick your student loan repayment into overdrive—your payments are likely to increase, but you’ll likely reduce the cost of interest over the life of the loan. In essence, you would be prioritizing paying off your student loans at the same time you are prioritizing your credit card debt.

When you refinance with SoFi, there are no origination or application fees. And as a SoFi member, you’ll have access to member benefits like unemployment protection, which could allow you to temporarily pause your payments if you unexpectedly lose your job. However, refinancing your student loans with a private lender means you’ll lose access to federal loan benefits, such as income-driven repayment plans, forbearance, and deferment.

To see how refinancing with SoFi could help you tackle your student loan debt, take advantage of our student loan refinancing calculator.

Take control of your debt by refinancing your student loans. You can get a quote from SoFi in as little as two minutes.


External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF DECEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE
FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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