Find out Money Girl's take on the student loan/credit card connection.
by Laura Adams
A Money Girl reader named Ryan P. asks:
“I have a $5,500 balance on my credit card that has a $7,000 credit limit. Should I use my excess student loan funds to pay it off?”
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The purpose of taking out a student loan is to pay for the cost of education and living expenses while you’re in school. Whether Ryan should use excess student loan funds to pay off a credit card depends on what he purchased with the card and whether he has additional education expenses to cover.
Let’s say Ryan’s $5,500 credit card balance is mostly made up of education expenses. If he used the card to pay for tuition, books, or course-related fees, using student loan funds to pay it down makes sense.
However, if Ryan’s credit card charges are consumer debts that go above and beyond his education or essential living expenses, paying them with student loan funds could be dangerous.
If Ryan is just beginning his education and is already using a credit card to live above his means, he might be tempted to take out more student loans to cover his card charges. That’s a destructive habit that could cause him to cripple his financial future by racking up massive education debt.
But if Ryan is nearing the end of his education and won’t need additional student loans, then he should use the excess funds strategically. Instead of sending them to his credit card, he should keep them as emergency savings in an FDIC-insured bank account.
Having cash reserves would keep Ryan safe if it takes longer than expected to get a job or if he has any large, unforeseen expenses. Once Ryan is out of school and starts earning income, he’ll be in a position to start paying down his credit card and student loan debts.
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