Office of Financial Aid

Debt is money that one entity – an individual, organization, or government – owes to another entity. The entity that does the borrowing is typically called the “borrower,” and the entity that lends the money is called the “lender.” Debt can be used to make large purchases that one cannot afford under normal circumstances. This arrangement allows the borrower to borrow money with the condition that it must be repaid by a certain date. Usually the lender charges interest in addition to the principal amount. From a student perspective, debt is most commonly associated with student loans, but it can also take the form of mortgages, credit cards, auto loans, and more.

Interest is the monetary charge associated with borrowing money. It is charged by a lender and applied to a debt arrangement and is usually expressed as an annual percentage rate (APR). There are two types of interest: simple and compound. 

According to an article by Experian, one of the country’s largest credit bureaus, “With simple interest, interest is only applied to the principal balance … . With compound interest, the lender calculates interest on the principal balance and also on the interest that's accrued since the last payment. So as interest accrues each day, the daily amount that's added to your balance increases.”

Similarly, there are two main types of interest rates: fixed and variable. A fixed interest rate remains the same for the life of the debt arrangement, whereas a variable interest rate can change over the lifetime of the arrangement. For that reason, it is generally more advisable to seek low fixed interest rates, which allow for faster repayment and ease of planning.

Learn more about interest rates as they pertain to student loans.

Using a debit card takes money directly from your bank account at the time of the transaction. Using a credit card does not take money from your bank account directly. Instead, each transaction adds to a sum called a balance which you make payments on to the credit card company after the time of the transaction. These payments can be in varying amounts and frequencies. Most people make one or two monthly payments towards their credit card balance(s). There are other important similarities and differences which you can explore further in Cash Course.

According to the U.S. Consumer Finance Protection Bureau, a credit score predicts how likely you are to pay back a loan on time. Companies use mathematical formulae called scoring models that pull information from your credit report to create a credit score. Some factors that make up a typical credit score include:

• Your bill-paying history

• Your current unpaid debt

• The number and type of loan accounts you have

• How long you have had your loan accounts open

• How much of your available credit you are using

• New applications for credit

• Whether you have had a debt sent to collection, a foreclosure or a bankruptcy and how long ago

Companies use credit scores to make decisions such as whether to offer you a mortgage, credit card, auto loan or other credit product. They are also used to determine the interest rate you receive on a loan or credit card and the credit limit.

The answer is almost never. This is because credit cards have much higher interest rates than most student loans. For example, credit card APR’s range from 13% to 24% depending on your creditworthiness, and can be fixed or variable. By contrast, interest rates for federal student loans are fixed rates and range from 3.73% to 6.28% for the 2021-2022 academic year (subject to change for future award years). Learn more about the interest rates for different types of federal student loans at StudentAid.Gov. Interest rates for private student loans vary with creditworthiness and from lender to lender. Sometimes they can even be lower than the rate for a Federal PLUS Loan for borrowers with excellent credit. Having a cosigner can reduce the interest rate of a private student loan.

The only situation where using a credit card for tuition and fees would not be the worst is if you are able to pay off the balance at the end of the billing cycle, thus not accruing interest. Also, some credit cards offer 0% interest for a specified amount of time when you first open an account. But it is of utmost important to understand the terms and conditions of the agreement before charging a large amount of tuition and fees. We recommend you contact the Office of Financial Aid to make sure you have exhausted other options.

Additionally, student loan servicers tend to offer more flexible repayment strategies than credit card companies.

Overall, it is almost always advisable to borrow a student loan than to charge tuition and fees to a personal credit card.

Explore CashCourse learning modules and tools, and check out our list of additional resources for more information. You can also read our guide to financial aid if you're planning to prepare for college financially.

Paying for college is a big part of your financial journey, and scholarships and student loans are two of the most common ways to pay for your education. As such, FranU has pages dedicated to both topics, each providing a comprehensive overview of what to expect and how to get started.

Visit the Loans or Scholarships pages to learn more.