Is it Better to Pay Off Student Loans or Credit Card Debt First?

Though student loan debt has now surpassed credit card debt, many Americans have the challenge of dealing with both.

The average college graduate now has more than $37,000 in outstanding student loan debt, and many people of those same people hold thousands of dollars in credit card debt as well.

If you’re a similar position—facing the challenge of paying off both student loan debt and credit card debt—you’ve probably wondered how you can prioritize which type of debt to pay off first and stay current on both bills.

The short answer is that paying off credit card debt should be your first priority, but there are several factors to consider.

Understanding your debt

Student loan debt is typically considered “good debt” because it’s an investment in your future and because it helps you build credit.

On the other hand, credit card debt is considered “bad debt.” It usually comes with high interest rates and it doesn’t benefit you in the long run. The current average interest rate on credit cards is 16.15%—compared to 4.45% on undergraduate direct subsidized and unsubsidized Stafford loans.

The interest paid on your student loans is also usually tax deductible.

How to prioritize debt payment

Since your loans with higher interest rates will likely be your credit cards, pay those off first, focusing on the card with the highest rate first. This will save you from paying more in interest over long run.

Once your highest-interest card is paid off, make that same payment to the card with the next-highest interest rate. Continue the process until all the credit card debt is paid. And in the meantime, limit your use of credit cards, which will help improve your credit score and keep your debt from increasing.

Another important reason to pay off credit card debt first is that a substantial student loan won’t directly damage your credit score, but a high credit card balance will.

That’s because a student loan is an installment loan—a set amount that’s paid back with regular scheduled payments. Credit card debt is revolving credit, which is not issued at a specific amount. (Though you will have a limit on what you can borrow on your credit card, the amount you spend is up to you.)

A factor that impacts your credit score is called credit utilization ratio, which is the ratio between your credit card balance and your credit limit. Student loans are not factored into this ratio.

Stay current on student loan payments

As you’re paying down credit card debt, stay current on your student loan payments. Those regular payments over time show that you are responsible in managing money, which increases your credit score.

On the other hand, if you ignore your payment obligation for student loans, you could go into default, which would add fees, create credit problems, and possibly result in lawsuits.

Tackle student loan debt efficiently

You can take a similar approach to paying off student loan debt as you do with credit cards. Tackle the highest-interest loan first and pay extra toward that debt. But if you’re already struggling with staying current on all your debt, even paying a little extra each month can seem impossible.

If that’s the case, consider some smart strategies to help you pay off your student loans faster:

• Take a side job or work overtime just to pay off one of your student loans early.
• Find out if you qualify for Public Service Loan Forgiveness.
• Look into income-driven repayment plans for federal loans.
• Consider consolidating your federal loans.

You can also refinance your student loan debt. By refinancing to a lower interest rate at the same or shorter term, a larger portion of your payment will go to the principal to pay down your loan faster. Learn more to find out if refinancing if for you.