Can You Pay Student Loans With a Credit Card?
Credit card rewards and zero percent introductory APR offers can make it tempting to pay off your student loans using plastic, but it's not always a smart move.
When you move student loan debt to a credit card, you give up certain protections. For example, you no longer have consolidation, deferment, forbearance or loan forgiveness options. If you have a federal student loan, you'll lose options for death discharge, disability discharge and the right to cure default, says student loan attorney Adam Minsky.
Plus, you'll face higher interest rates and fees. Federal student loan servicers won't let you pay with a credit card directly -- you have to use a payment service like Plastiq, which acts as an intermediary for a fee. And if private student loan companies accept credit card payments, they may charge a transaction fee as well.
Michael Lux, founder of The Student Loan Sherpa, a student loan education, strategy and advocacy site, says, "It costs the lenders money to accept payment via credit card, so they don't like to do it.. However, when borrowers have fallen behind on their debt or can't otherwise make the payment, lenders are more likely to accept a credit card payment."
Are the Best Types of Credit Cards for Student Loan Payments?
Some credit cards have features that can make them a good choice for student loan payments.
Rewards Cards
Rewards cards can be advantageous for student loan payments in two ways:
They earn rewards on student loan payments. When you pay your student loan with a rewards credit card, you can earn points, miles or cash back -- just as you would on other purchases. However, if a fee is required to pay your student loan with a credit card, you may pay more in fees than you earn in rewards. For example, if you pay a 2.5 percent fee to use your card but only earn 2 percent cash back on the transaction, you won't come out ahead.
They let you redeem rewards for student loan payments. Paying down your student loan balance with earned rewards is a more viable option. With some cards, you can earn rewards on purchases, including dining, entertainment and travel, then redeem them as a student loan payment directly.
[Read: The Best Rewards Credit Cards of 2018.]
The Citi ThankYou rewards program allows cardholders to redeem rewards for student loan payments at a rate of one cent per point. If you have the Citi ThankYou Preferred Card and spend $6,000 per year on dining and entertainment, which are double-point categories, you'll earn 12,000 points. Spend an additional $6,000 annually on other expenses such as gas and groceries, and you'll earn another 6,000 points for a total of 18,000 points. Those points can be redeemed for $180 toward your student loan balance.
Although most other credit card rewards programs don't offer student loan payments as a direct redemption option, they may allow you to redeem your rewards as a check or direct deposit to your bank account. With rewards funds in your bank account, you can make a payment to your student loan issuer.
In addition to participating in your credit card's rewards program, you can sign up for Upromise, which allows you to earn cash back that you can put toward your loans. Owned by student loan provider Sallie Mae, Upromise issues rewards whenever you use your credit card at a participating retailer or restaurant. You can link your Upromise account to your Sallie Mae student loan for automatic transfers or simply request a check.
Balance Transfer Cards
Balance transfer cards with zero percent introductory APR offers may be a good option for paying your student loans. Although student loan interest rates are generally lower than rates on credit cards, nothing beats zero percent interest. If you transfer some or all of your student loan balance to one of these credit cards, you won't accrue interest on the balance during the first six to 21 months, depending on the card's terms.
Using a zero percent introductory APR offer for your student loan balance can save you interest, but only if you're careful. This option makes sense if you only transfer as much of your student loans as you can pay off before the introductory APR period ends.
If you don't pay the full balance before the introductory period is over, you'll pay interest on the remaining balance. Credit card interest rates can reach 25 percent or higher.
If you can't pay your balance before the introductory period expires, it's possible to open another card with a new zero percent introductory APR offer for the remaining balance. However, you'll need to qualify for a new card and transfer the balance before the standard APR begins to avoid any interest charges.
Another consideration is balance transfer fees, which can eat into your interest savings. Some credit cards transfer balances with no fee, or at least no fee for an introductory period, but it's common to see a fee of 3 to 5 percent. If your student loan interest rate is at or below that of the balance transfer fee rate offered by your credit card, it doesn't make sense to transfer your balance.
[Read: The Best Balance Transfer Credit Cards of 2018.]
Not all credit card issuers offer student loan balance transfers. Some allow it under certain conditions, including:
-- Bank of America
-- Barclays
-- Capital One
-- Chase
-- Citi
-- Discover
-- PenFed Credit Union
-- SunTrust Bank
Some issuers offer convenience checks that can be used to pay student loans. However, convenience checks are not balance transfers and are typically charged interest at a cash advance APR, which is usually higher than the standard APR.
Additional Factors to Consider When Using a Credit Card to Pay for Student Loans
Make at least the minimum payment every month. If you miss a payment or are late making your payment, you may trigger a penalty APR, which is often as high as 29.99 percent. This rate can easily outweigh the value of any rewards you earn by making payments with a credit card, and you'll lose your zero percent introductory rate on balance transfer cards when you trigger the penalty APR.
Don't max out credit card limits with student loan balance transfers. You can only transfer as much of a balance as you can qualify for. If you have $20,000 in student debt but only qualify for a $10,000 credit limit on a balance transfer card, you will only be able to transfer $10,000 to the card. The remaining $10,000 will stay on your student loan balance. Be aware that using more than 30 percent of your credit limit is not recommended, as a high credit utilization rate can lower your credit score.
Get preapproved before applying. You should only apply for credit cards that meet your needs and that you think you'll be approved for. A preapproval can give you an idea of whether you'll be approved and the credit limit you can expect. Knowing your credit limit is especially important for balance transfer cards so you can compare offers to find the best card for your needs. Preapprovals protect your credit rating because they're a soft inquiry that doesn't affect your credit, unlike a hard inquiry performed when you submit a full application.
[Read: The Best Cash Back Credit Cards of 2018.]
Avoid annual fees. Annual fees can eat into any savings you realize when using a credit card to pay for student loans. Ideally, you should look for a credit card with no annual fee. If you choose a card with an annual fee, make sure it will save you at least as much as the annual fee.
Choose a credit card with the lowest APR possible. Even if you plan to pay your balance in full before interest applies, it's a good idea to look for a card with a low APR in case your payments don't go according to plan.
The Bottom Line
Credit card fees, the loss of student loan protections and the risk of transferring low-interest student loan debt to potentially high-interest credit cards make paying student loans with a credit card a bad idea for most people.
"Always look for alternatives to using credit cards to pay student loans," says Barry Coleman, vice president of counseling and education programs for the National Foundation for Credit Counseling. "What may appear as an easy option in the short term could get borrowers deeper in debt by transferring one type of debt for less-favorable revolving debt."
Coleman encourages student loan borrowers to consider alternatives, including forbearance or deferment. He says it's a good idea to contact your loan servicer to learn about your options.
For students in a tough financial situation, Lux recommends finding a solution that will work in the long term. That may include refinancing with another company, signing up for an income-driven repayment plan or starting a second job to generate extra cash. "Don't take shortcuts today and leave yourself with bigger problems in the future."
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