Cost of Borrowing

Case Study
Should Our Student Borrow Money to Pay Off Outstanding Credit Card Debt?
Cost of Money | Credit Card
Our student has $10,000 of credit card debt. She is only able to pay the minimum payment amount while in veterinary school but believes that she will be able to pay the total balance her first year out of school.
The credit card’s Annual Percentage Rate (APR) is 24.49%. Our student pays an average minimum monthly payment is $218.96 for a total of 60 months (four years in school plus one year out). Using a credit card payment calculator, the total payment amount, interest paid, principle paid, and outstanding balance at the end of five years was determined (figure 1).
Cost of Money | Student Loan
Now lets look at the cost of borrowing $10,000 in student loans to pay off the credit card debt.
In this example, our student borrows $10,000 in additional students loans the first semester of veterinary school. The student plans to pay back her student loans using the 10 year standard repayment program.
The following example (figure 2) walks through the cost of borrowing with student loans. To reach the total cost, each monthly amount was calculated and summed using Excel.
What Should Our Student Do?
Under these specific conditions, it costs our student $10,724.42 to borrow $10,000 for five years on her credit card or $3,783.30 to borrow that same amount of money for 14 years using student loans (figure 3). This means our student would save a total of $6,941.12 by paying off the credit card on the first day of veterinary school.
Putting It All Together
Now let’s assume our student only has $5,000 in credit card debt and she plans to pay off the balance within six months of graduation (before the end of her student loan grace period). 
For the following questions, use a principle amount of $5,000, period of 54 months, APR of 24.49% and a monthly payment amount of $130.
What if the student had an outstanding auto loan instead of credit card debt?
For the following questions use a principle amount of $15,000, a period of 54 months and an interest rate of 4.21%.


  1. I feel like most of the time students are told not to pay off credit card debt with student loans, but with no explanation for why. Thank you for taking the time to explain the math behind the situation. Much appreciated @iwidensky !

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