Think Twice Before Using Credit Cards to Repay Student Loans

Using credit cards to repay student loans may encourage a vicious cycle of spiraling debt.

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At the Student Loan Ranger, we think it's great when major players in the private student loan market like Sallie Mae offer advice on how to avoid spiraling debt from credit cards. But we also feel that Sallie Mae is sending a mixed message when it encourages borrowers to use credit cards by linking them to repaying student loan debt.

[Learn more about paying for college.]

For example, the Sallie Mae Cash Back Visa Card allows you to redeem the rewards you earn from using the card to make extra payments on your eligible Sallie Mae student loans (you have to make your scheduled payments separately). So amassing credit card debt at a variable annual percentage rate (APR) that begins at 11.99 percent, 13.99 percent, or 15.99 percent based on your creditworthiness when you open your account will help you pay a little bit back on student loans, which probably have far lower interest rates right now. By the way, we say you'll pay a little bit back because the rewards aren't all that generous.

And then there's Sallie Mae's pilot program offering a credit card to parents who cosign their children's private loans that provides cash-back rewards for making payments on the loans. Basically, parents who cosign a line of credit (the loan) can get another line of credit (the card). They are then encouraged (with cash rewards) to use the credit card to pay off student loans that again probably have far lower interest rates.

This seems to encourage a vicious cycle of spiraling debt. So we did a double take when we saw Sallie Mae's president quoted as saying, "Just as we saw in the mortgage space, people taking mortgages larger than they can afford, bad things can happen … The same thing can happen in the student loan space … The challenge is to get families to start thinking about this before the student loan bill shows up."

We doubt families will be more ready to pay off student loans because they have a credit card. And we really doubt that Sallie Mae—which increased its profits in the first nine months of this year to $109 million—is creating these cards primarily to educate families on student loan debt.

[Find out how one family is paying for college without borrowing.]

It may not be optimal, but the reality is that most of us have to borrow to help pay for the higher education we pursue. And, as the outrageous growth of student borrowing has resulted in a national student loan debt burden that is quickly closing in on an unbelievable $1 trillion, all of us will need to learn to take on and repay that debt responsibly.

So while it's not as exciting as a shiny new credit card, we emphasize the importance of learning about repayment options like Income-Based Repayment and Public Service Loan Forgiveness. If you want to learn more, register for our free student debt relief webinar, "Plan Before You Borrow."

It's also why we emphasize the importance of borrowing frugally and wisely after thoroughly evaluating all of your financing options and the importance of maxing out federal student loans with their basic borrower protections before turning to private loans. Unfortunately, as the Department of Education reports, there has been a rise in borrowing of private loans, especially among undergraduates.

We will have more on that report next week, so stay tuned. In the meantime, stay connected with us on Twitter (@EJW_org #studentdebthelp) and Facebook to hear what's happening. Happy holidays from all of us at Equal Justice Works and the Student Loan Ranger!

Isaac Bowers and Radhika Singh Miller work in the Communications and Outreach unit, responsible for Equal Justice Works' educational debt relief initiatives. They conduct monthly webinars; advise employers, law schools, and professional organizations; and work with Congress and the Department of Education on federal legislation and regulations. Isaac received his J.D. from New York University School of Law and was previously a fellow at Shute, Mihaly & Weinberger LLP. Radhika graduated from Loyola Law School Los Angeles and was previously a staff attorney at the Partnership for Civil Justice.