Few investments are as rewarding or valuable than the ones you make in your education. Unfortunately, if you choose the college route, this is not cheap; student loans pay off handsomely in the job market, but student loan debt can also become crippling. The average student who graduated in 2018 owed over $37,000 (in 2005, this figure was only $20,000).
Even so, this is something you have to deal with if your plans for the future involve having a degree, your parents aren’t wealthy, and you’re not exceptionally good at kicking a football. Since student loans are a necessary evil, it’s essential to spend quite some time thinking about how you can make them a little more affordable. As one example, you can apply for a deferment by taking your education further (as long as you’re enrolled at least half-time), or by joining the Peace Corps. Another interesting question is this: can you pay student loans with a credit card? And if so, should you?
Using Credit Cards to Repay Student Loans
The worst thing about the typical credit card is its high-interest rate: 15% or more, compared to 2.75% for federal undergraduate loans and 4.30% for graduate studies. However, many credit cards come with an introductory interest rate of zero. This feature means you can transfer a balance from another card, make purchases and (in some cases) pay your student loans without making more than the necessary credit card payments. Additionally, many cards will offer you cashback on different kinds of transactions, including when you make loan payments.
Of course, paying for student loans using a credit card doesn’t reduce your debt burden: you owe someone else and still have to make loan payments every month. Aside from the lower interest on loans for student debt, they have some pretty significant consumer protections which you wouldn’t find on a credit card.
For one thing, student loan debt, while difficult to get rid of, is usually discharged (i.e., canceled without having to be paid) in the event of the student’s death or permanent disability. You’ll lose this option if you move student loan debt to a credit card. Under various circumstances, you can temporarily stop making payments on a student loan or even have your balance forgiven. You’ll have no such luck with credit cards unless you declare bankruptcy and successfully petition to have them discharged, leaving your credit score in ruins. In this case, you’ll still be on the hook for any student loan payments you made on the credit card.
How and When to Use a Card to Pay Your Student Loans
When it comes to paying student loans with a credit card, you should be aware and a little scared of the pitfalls of using this strategy. On the other hand, and despite the interest rate, a credit card can be a handy tool for student loan payments as long as you use it strategically.
Using Rewards Cards
In the first place, you should look at credit cards with suitable rewards programs. You can look for cashback on loan payments or find a card that allows you to apply miles or points to your student loan payments (by requesting the cash value as a check or direct deposit). The Bank of America Premium Rewards credit card, for instance, costs $95 a year but awards you between 1½ and 2 points per dollar spent. If you charge at least $3,000 to it in the first three months, you will receive 50,000 bonus points, translating to $500 you can use to pay student loans.
There is one drawback you should be aware of: the Treasury Department doesn’t allow you to use a card to pay your student loans directly, so you may have to either request a cash advance or use a service like Plastiq or PayPal. Private student loan providers typically charge a fee on credit card transactions, too – if you’re spending 2% just using the credit card and only getting one percent cash back, you’re working backward.
Getting a Balance Transfer Card
Aside from rewards programs, banks also try to attract new clients by offering a few months with zero interest on a new card. Though the average interest rate is much higher than that on student loans, you can use this loophole to your advantage: every $1,000 you transfer to a card with a 12-month grace period saves you about $50. These savings, of course, assumes that you manage to pay down the entire balance before the interest rate shoots back up to normal levels. You would also have to choose a no-fee balance transfer card like the BankAmericard for Students ($0 annual fee, 0% APR for the first 15 billing cycles, 0% transfer fee, but does require a decent credit score). Many credit cards also allow you to transfer a portion of your student loans, but charge approximately 3% of the total, wiping out your gains.
Protecting Your Credit Score
When the unexpected happens, and you need to use your student loan payments for stuff like car repair and groceries, putting them on your credit card can keep you from being charged late fees and your credit history from taking a knock. We’re assuming that you can keep up with at least the minimum payment on your credit card – if you find yourself short of cash every month, you should look beyond just student loan payments to balance your budget.
Weighing Your Options
Before applying for a new credit card, it’s always a good idea to get pre-approval: this doesn’t harm your credit score and will give you a good idea for what limit and what interest rate you qualify. You should also check the specific terms very carefully: some credit card issuers, for example, may allow you to make student loan payments but record the transaction as a cash advance instead of a purchase, increasing your costs. That said, some student loan providers don’t accept credit card transactions, forcing you to pay extra for a third-party payment service. It’s essential to do the math, or you may end up refinancing good debt with bad.
Can you think of any creative ways to reduce the burden of student loans? We’re all open to suggestions; please drop us a line in the comment section.