Is It Illegal to Use Student Loans to Pay Off Credit Cards?
Student loans are typically intended for educational expenses. Here’s what you need to know about using them for credit card debt or other purposes.
May 17, 2022
Credit card debt can be a huge burden, both financially and emotionally. Frequently, it prevents you from making progress towards other financial goals. — and it can often prevent you from making progress towards other financial goals.
If you feel alone in this burden, you might be surprised to learn this type of high-interest debt is very common: Studies suggest that around 45% of American households have credit card debt.
If you have credit card debt, you’re likely exploring all your options to get out of it; maybe even using student loans to pay off your cards.
But is it even legal to use student loans to pay off credit cards? The answer depends on several factors.
Is it illegal to use student loans to pay off credit cards?
It’s not illegal or unlawful to use student loans to make payments towards credit card debt. However, it could be against the terms of your loan agreement.
In other words, it won’t get you into trouble with the law — but it could cause some issues with your lender. Check your loan agreement documents for details on what is and isn’t allowed with loan funds.
The exception is if you have put qualifying educational expenses on your credit card and then use student loans to pay off those charges. In this case, you are technically using the funds for educational expenses.
In the case of student loans being used to pay off existing credit card debt, that’s where things get trickier. This is against the terms of most loan agreements — but that doesn’t stop students from doing it anyways.
Some students may see that they’re paying 15%, 20% or even more interest on credit card bills and only around 4% on student loans. This makes it tempting to use student loan funds to pay down credit cards — but this typically isn't a wise strategy.
Student loans are intended for educational and living expenses only
According to the Federal Student Aid website (part of the Department of Education), “all loan funds must be used for your education expenses.”
“Education expenses” refers to things like tuition, books, etc. Examples of qualifying expenses include:
Tuition and fees
Books and supplies
Room and board (like meal plans)
Equipment for school
Necessary living expenses
Typically, student loans are applied to tuition and fee costs first. The funds are sent directly to the school to cover tuition and required fees. If any money is left, those funds are disbursed to the student.
From there, the student has the freedom to choose how and where that money is spent. Technically, the funds are only supposed to be used for supplies, books, rent, etc. Once the student has the money, there’s no real way to track how they spend it.
Bankruptcy doesn’t affect student loans
Another consideration is that using student loans to pay off credit cards changes the nature of your debt.
When an individual declares bankruptcy, they may be able to discharge certain debts — including credit card debt.
However, student loans aren’t affected by bankruptcy. By transferring credit card debt to student loan debt, you eliminate the possibility of resolving those debts through bankruptcy.
Remember that bankruptcy should be an absolute last resort, as it can ruin your credit score.
Increasing student loan debt could strain your future finances
Some students might be tempted to take out more loans than they need to pay down debt or fund their lifestyle.
However, this can lead to serious problems down the road. The more debt you accumulate now, the longer it’ll take to pay off. Plus, larger student loan balances equal larger monthly payments — and it may be challenging to make those payments in the future, particularly shortly after graduating.
How to pay off debt while in school
Now we know the answer to “is it illegal to use student loans to pay off credit cards” and understand why it’s not a good idea to use student loans to pay off credit cards. But how can students pay off credit card debt? Here are a few options to consider.
Explore consolidation options
You may be able to consolidate your debt into a lower-interest loan. For instance, you may be able to qualify for a personal loan or a debt consolidation loan, and you could then use those funds to pay off your credit cards.
The advantage of this strategy is that it could potentially help you save money on interest. Plus, you won’t have as many monthly bills to manage.
Increase your income
If you can start making more income, you can funnel that money directly into paying down credit card debt. For students, this could look like:
Starting a side hustle
Driving for a rideshare or delivery company
Selling unneeded items online
Applying for work-study
Finding a part-time job
Try to use most or all of your new income to pay off debt if you can. Your future self will thank you.
Stop adding more debt
Try not to continue using your credit cards unless it’s absolutely necessary. Debt can be a vicious cycle, and it’s tough to break out of if you’re continually adding more.
To stop using your credit cards, you may need to cut back on unnecessary expenses (or increase your income).
Use the “debt avalanche” or “debt snowball” method
There are two main strategies or philosophies for paying off debt.
Debt avalanche method: The debt avalanche method says that you should prioritize paying off the debts with the highest interest rates. If you have 2 credit cards with APRs of 17% and 22%, you would pay off the 22% card first — regardless of how large of a balance you have on either card. This is the optimal method mathematically, as it saves you the most in interest costs.
Debt snowball method: The debt snowball methodsays you should prioritize paying off your smallest balances first (ignoring interest rates). The idea here is that you can gain momentum by eliminating certain debts. Psychologically, this can create a substantial boost that may make it easier to keep paying off debts.
In general, it’s not a good idea to use student loans to pay off credit cards. Loan agreements dictate that student loans should be used for only educational and living expenses.
If you have existing credit card debt, consider using Tally† before allocating funds earmarked for educational expenses to pay down your cards. Tally is a credit card debt repayment app that helps qualifying Americans pay off credit card balances faster.
If you struggle with credit card balances, utilizing the tips above can help. For even more knowledge, check out the Tally debt payoff blog.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. Based on your credit history, the APR (which is the same as your interest rate) will be between 7.90% - 29.99% per year. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.