Student loan debt and credit card debt rank as two of the highest forms of consumer debt in the United States. Outstanding debt from student loans surpassed debt from credit cards for the first time ever last year and now stands ready to eclipse the $1 trillion mark. Sometime soon, if borrowing and spending trends continue, debt from education loans and credit cards combined will probably start pushing an unprecedented $2 trillion.
Together, debt from college loans and credit cards is so potentially toxic that it seems outlandish to even suggest any notion of mixing the two. That’s why we were so puzzled to read an article posted by U.S. News & World Report’s Student Loan Ranger that describes two programs by student loan giant Sallie Mae that encourages borrowers to repay their private student loans with credit cards issued by the lender that almost assuredly have far higher interest rates than the loans themselves.
The article, written by Equal Justice Works, a nonprofit organization that helps remove financial barriers for law students and lawyers seeking public service careers, was quick to point out Sallie Mae’s apparent contradiction. On the one hand, the article says, Sallie Mae offers good advice on how to avoid spiraling debt from credit cards. On the other hand, Sallie Mae encourages borrowers to use credit cards by linking them to student loan repayments, which, the article notes, “seems to encourage a vicious cycle of spiraling debt.”
Under the Sallie Mae Cash Back Visa Card program, borrowers can redeem the rewards they earn from using the card to make extra payments on their Sallie Mae private student loans. According to the program’s pricing and terms disclosure, the variable rate on the card ranges from 11.99 percent to 15.99 percent. Of course, like many other credit cards, if a borrower makes a single late payment, goes over the credit limit, or makes a payment that is returned, the APR climbs to 29.99 percent. Like other credit cards, there is also a collection of transaction fees and late fees and over-the-credit limit fees that can pile up if a borrower isn’t careful.
Combine high interest rates with paltry cash-back rewards of between 1 percent and 3 percent and it’s hard to see how amassing credit card debt at higher interest rates than the student loans the card purports to help pay will actually be beneficial.
A second, perhaps even more perplexing Sallie Mae program offers a credit card to parents who cosign private education loans for their college students. The card offers cash-back rewards when parents use it to make student loan payments on behalf of their kids. In other words, parents who cosign a line of credit (the student loan) can get a second line of credit (the credit card) that can be used to pay off the first line of credit at, in all likelihood, a much higher interest rate.
In the end, the article concludes, the Sallie Mae credit card programs are just one example of why borrowers should avoid using credit cards to pay off student loans. Instead, the article recommends that students borrow frugally and wisely and start with federal student loans, which have lower interest rates and offer more borrower protections than private student loans. The article also recommends that students who need help paying their student loans should explore repayment options like Income-Based Repayment and Public Service Loan Forgiveness, which help students pay back education loans without going into further debt.
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