Credit Cards vs. Student Loans: What’s the Best Way To Pay for College?

Because of the rising cost of higher education, many students struggle to make it through their college years without borrowing at least some money. Plenty of financing options are available, but student loans and credit cards are two of the most popular. While both can be effective, loans and credit cards are generally suited to different types of expenses.

If you're considering taking on debt to pay for college, whether it's your tuition, living expenses, or anything else, it's important to consider the benefits and risks of both credit cards and loans.

Should you use credit cards or student loans for college expenses?

While there's rarely a one-size-fits-all solution to personal finance decisions, student loans are generally better than credit cards when it comes to paying for college. These loans, which are offered by both the federal government and many private lenders, are designed for college expenses. They have plenty of benefits, including lower interest costs.

“Student loans have several features that are optimized for college students,” says Mark Kantrowitz, author of “How To Appeal for More College Financial Aid.”

“These include flexible repayment options, such as an in-school deferment, a grace period after graduation, other deferments and forbearances, income-driven repayment plans, and level repayment (standard/extended).”

Another perk is that student loans offer the possibility of loan forgiveness, especially if you work in public service or meet certain loan discharge requirements. Credit cards offer no such benefit.

Student loans are especially well-suited to large and school-specific expenses, including tuition and room and board. However, that doesn't mean credit cards are never a good option.

“Credit cards are better for short-term use, such as a 0% APR promotion,” says Kantrowitz. “They are worse if you carry a balance from month to month. Thus, they are best for short-term cash flow needs.”

Current private student loan rates

Comparing interest rates: Credit cards vs. student loans

One of the biggest differences between student loans and credit cards is their interest rates. Federal student loans have low, fixed interest rates. For example, the interest rate for undergraduate loans taken out on or after July 1, 2024, and before July 1, 2025, is 6.53%.

Meanwhile, the average interest rate on credit cards at the end of 2024 was 21.47%, according to data from the Federal Reserve. There are also significant differences in the way the two types of debt accrue interest.

Subsidized federal student loans offer the advantage of not accruing interest while you're still in school and during a grace period after you graduate. This can lead to big savings compared with credit card debt, which starts accruing interest immediately on any balances carried from month to month.

Student loans charge simple interest, which means your loans accrue interest daily, but that amount isn't added to your loan principal (except in select situations where your interest capitalizes). On a traditional repayment plan, you'll pay off all of your interest each month, meaning you'll never see your loan balance grow.

Meanwhile, the compounding interest on credit cards means that your interest is added to your principal balance and also begins to accrue interest, causing the balance to rise quickly.

While private student loans typically have interest rates that are higher than federal loans, they're still considerably lower than the rates on credit cards.

Repayment terms and monthly payments

Student loans and credit cards differ significantly in their repayment terms. When you take out student loans, you typically won't have to make any payments until six months after you graduate or leave school. At that point, you'll choose a repayment plan to repay your loans over anywhere from 10 to 30 years.

In some cases, you can choose an income-driven repayment plan, where your payments are based on a percentage of your income. After a certain number of years (10 to 25, depending on the plan), your remaining balance will be forgiven.

Credit cards work a bit differently. First, you must pay your credit card bill each month that you have a balance — there's no deferment option.

And unlike most student loan payments (except some private student loans with a variable rate), your credit card payments aren't fixed. Instead, they're based on a percentage of your current balance. So, if you've used your credit card more in the past month, then your bill will be higher. You can avoid paying interest by paying off your card in full each month. But any unpaid balance will start accruing interest.

Risks of using credit cards for college expenses

Using your credit cards for college expenses comes with plenty of risk. The high interest rates and compounding nature of the interest mean you'll end up paying a lot more for your credit card debt than your student loan debt.

“Your prefrontal cortex, the logical decision-making part of your brain, is not fully developed until you turn 25, and most college students graduate long before that,” says Jen Smith, cohost of the “Frugal Friends Podcast.”

“All college students go into getting a credit card with the best of intentions, but the fact is they're not fully capable of the most rational decisions at that age. And when you're not making a good income, those impulsive decisions and maxed-out credit cards can haunt you for a long time,” she adds.

If you've racked up too much credit card debt, it can be challenging to get out from under it. You may not be able to make more than your minimum payment, which can lead to high credit utilization and a lower credit score.

And if you can't make your payments at all, the consequences are even more serious. Aside from the additional interest and fees, there will be a negative impact on your credit. This can affect your future ability to borrow money, rent an apartment, get affordable insurance, and more.

When does it make sense to use a credit card instead of student loans?

Credit cards aren't ideal for most college expenses, especially large ones like tuition and room and board. However, there may be some situations where credit cards are a good option.

Credit cards may be a good choice for your day-to-day expenses if you're able to pay off your balance in full each month. You can earn some cash back or points rewards without paying interest on your card.

Credit cards can also be a good option for one-off expenses where you either have the cash on hand to pay off the full balance or where you qualify for a 0% APR introductory offer and can pay off the balance before interest starts accruing.

“In college, when I wanted an iPad, I saved up the cash for it, but instead of going to the Apple Store with the cash, I went in with a new credit card that I bought it with, got a welcome bonus, and then immediately paid it off with the cash I'd saved,” says Smith. “That welcome bonus then got me a free flight that I used to save on a summer vacation.”

Alternatives to credit cards and student loans

While student loans and credit cards are two of the most popular financing options available to college students, they aren't the only options.

Some students may turn to personal loans to help fund some of their living expenses, though that option isn't ideal due to their higher interest rates, shorter repayment terms, lack of borrower protections, and the fact that they require immediate repayment.

There are also plenty of options that don't require borrowing money at all. For example, scholarships and grants are two types of financial aid that don't have to be repaid. While they may take a bit more effort to find and apply for, they pay off in the long run.

Another option, if you qualify, is the federal work-study program, which allows you to work on or off campus to earn money for school. Even if you don't qualify for work-study, any side job can help ease the financial burden while you're in school.

“But ultimately, your best option is lowering the expenses you have for college by using public transportation, buying used books and used technology, and just finding other creative ways to spend less in college,” says Smith.