Student Loans vs. Credit Cards

All of your friends have a credit card, so shouldn't you be using one too? Not so fast. While private student loans are often positioned as predatory in the media, there is more to them than meets the eye.

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Important Note: This piece is written assuming you have exhausted all other forms of aid, including grants and federal and state sponsored loans. Please also consider doing extensive research as to the resources available to you through you respective school. 

Most students must ultimately consider forms of debt and financing beyond grants and government sponsored resources. The financial maze of college education often leaves students juggling between the next two forms of debt: private student loans and credit cards. While both are essentially forms of borrowing, their mechanics, benefits, and drawbacks differ significantly. It's crucial to understand these differences to make informed decisions about funding your college journey.

While some of these choices may appear obvious, I've come across too many friends and individuals who carry a significant interest accruing balance on credit cards throughout college.  

Interest Rates

Credit cards often carry higher interest rates than student loans, frequently exceeding 20% when you consider the average credit score of a college student. These higher rates can significantly increase the total amount of debt over time via interest accrued. 

On the other hand, private student loan interest usually falls below 10%. In some cases, private student loan providers may offer a structure similar to federal subsidized loans, where the loan is interest-free while they are in school, making them a more cost-effective choice.

Debt Management

Credit card balances are revolving, meaning they can grow until you reach your credit card limit, unless you're paying off the full balance each month. This, coupled with high interest rates, can make it challenging to manage and pay off credit card debt.

Student loans, conversely, are non-revolving and considered installment loans. You have a fixed balance and pay it off in monthly installments over time until the balance is zero, allowing for predictable and manageable payments.

Repayment Terms and Options

Credit cards require immediate minimum payments, often only covering the interest accrued on the principal balance the previous month. This approach allows the interest to continue growing, slowing the payoff process. Unlike student loans, credit card repayment plans aren't based on income, ability to pay, or financial hardship.

In contrast, most private student loans do not require payments while you're enrolled at least part-time in school. Most private student loan providers offer a number of options for repayment terms.  

Refinancing Options

Credit cards don't offer refinancing options. Some individuals may choose to take advantage of balance transfers that offer lower interest rates, which can help pay off debt but might also lead to increasing overall debt if not handled responsibly.

Student loans, particularly with a good credit score, can be refinanced at a lower interest rate. However, please note, it's crucial to research before refinancing federal loans, as you might lose out on certain benefits and protections.

Return on Investment

Credit cards are often used for everyday purchases offering immediate gratification and frequently earning you rewards.  However, it's important to note that these rewards generally get no one near offsetting late fees and interest accrued if you're not regularly paying off your entire balance. 

On the other hand, student loans are usually directed towards cost of attendance items like books, supplies, personal expenses, and living expenses. Upon graduation, your college degree can pave the way for better-paying job opportunities, offering a long-term return on investment.

To illustrate, consider this 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 balance: $10,000 Interest: 5% APR Total cost in interest when paying the minimum due: $5,430.

Our Winner: Private Student Loans

If managed correctly, private student loans offer much more flexibility on repayment terms and more reasonable interest rates for students.  Even holding a balance of a few thousand dollars on your credit card can result in significant interest accrued over time if you are unable to pay your balance in full every pay period.

In general, if you do not have the means to pay off your credit card balance in full at every pay period, you should not consider a credit card.  

Conclusion

Despite some students' aversion to debt, if managed correctly, borrowing a private student loan can help establish credit as well. The sooner you start building credit, the better. Reach out to your financial aid counselor to discuss your options and determine the best course of action for you.

Remember, your college years should be more about expanding your horizons and less about worrying over financial matters. Equip yourself with financial knowledge and make informed decisions to get the most out of your experience. 

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