Lana Oconnell
Student loans can be a long-term burden, impacting your credit score and financial health. While it is possible to pay student loans with a credit card, it is often a complicated and costly process. Credit card interest rates are typically higher than student loan interest rates, and direct credit card payments may result in excessive fees. However, with careful consideration, there are strategies to utilise credit cards to manage student loan debt. Balance transfers from credit cards with 0% APR promotions can help avoid credit card interest, and specific credit cards offer rewards and cash back that can be redeemed and put towards student loan payments. Additionally, cash advances from credit cards can be used for student loan payments, but they may activate high APRs and increase credit card balance. It is essential to understand the risks and costs associated with each option and explore various repayment plans to make informed decisions.
| Characteristics | Values |
|---|---|
| Possibility of paying student loans with a credit card | Yes, but it may be complicated and costly |
| Interest rates on student loans | 4.5% to 7% for federal loans in 2019-2020; private loans can be higher |
| Interest rates on credit cards | Average of 17% and can be higher |
| Benefits of using a credit card | Prevent student loan interest from accruing, more flexibility in repayment schedule |
| Drawbacks of using a credit card | Higher APR, fees for balance transfers, cash advance fees, negative impact on credit score |
| Recommended credit cards for balance transfers | Freedom Unlimited, Freedom Flex, Double Cash, Amex Blue Cash Everyday, Chase Slate Edge, Amex Blue Cash Preferred |
| Credit card rewards for student loan payments | Chase Ultimate Rewards, SoFi Credit Card |
| Impact on credit score | Making timely payments builds positive credit history and can raise your score |
| Credit score requirements for student loans | Vary depending on loan type; federal direct subsidized loans have no credit score requirements |
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What You'll Learn
Balance transfers
If you want to use a credit card to pay your student loan, you'll have to do it as a balance transfer. In this type of transaction, you're not really putting the payment "on the card". The bank that issued your card pays your lender directly. Then the card issuer adds the amount to your credit card balance.
While the prospect of getting a lower interest rate on a transferred balance is enticing, paying your student loans with a credit card does have risks. Many loan services don't allow student loan payments to be made with a credit card. Federal student loan borrowers might have trouble transferring student debt to a balance transfer card for two main reasons: The US Department of the Treasury prohibits accepting direct credit card payments to repay loan debt, and you lose federal loan protections by transferring your balance to a private lender, which includes credit cards.
Credit card balance transfers aren't your only option for paying off your student loans. You can also pay them directly (that is, in line with your loan promissory agreement), via a credit card cash advance, or through a special repayment plan negotiated with your lender.
If you stick with the Freedom Unlimited card, Freedom Flex card, Double Cash card, Amex Blue Cash Everyday card, Chase Slate Edge card, or Amex Blue Cash Preferred card, you might end up saving quite a bit on interest fees.
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Cash advances
A cash advance is a loan offered by your credit card issuer. When you take out a cash advance, you are borrowing money against your card's line of credit. The amount of the cash advance is added to your credit card balance, and interest begins accruing immediately. Cash advances typically come with a higher APR than regular purchases, and you may also incur a cash advance fee.
If you have a credit card that allows cash advances, you can access cash in several ways. Getting a cash advance from an ATM usually requires your physical card and a personal identification number (PIN) provided by your card issuer. You might also be subject to daily ATM withdrawal limits and fees. Your credit card issuer may also provide you with convenience cheques linked to your card account, which are charged against your credit account. You might also be able to use your card to take out cash advances in person at a branch. Remember to take identification with you.
While it is possible to use a cash advance to make student loan payments, it may not be a good idea. Cash advances may activate a high APR and will increase your credit card balance, making this a costly approach. It is important to understand the costs of a cash advance and how they work before taking one out.
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Repayment plans
Federal Student Loans:
Federal student loans are offered by the US Department of Education, and the interest rates are set by the government annually. These loans typically offer more flexibility in repayment options. Here are some repayment plans available for federal student loans:
- Extended Repayment: This option allows borrowers to extend the repayment period, reducing the monthly payment amount.
- Graduated Repayment: The graduated repayment plan starts with lower monthly payments that gradually increase over time, allowing borrowers to align with expected future income growth.
- Income-Based Repayment: This plan calculates the monthly payments based on the borrower's income, providing a more affordable repayment schedule.
- Forbearance and Deferment: In cases of financial hardship, borrowers may be eligible for forbearance or deferment, temporarily paasing or reducing payments.
Private Student Loans:
Private student loans are provided by banks, credit unions, or other financial institutions, and they often require a credit check or a co-signer. Private loan issuers are not obligated to offer the same repayment options as federal loans, but they may be willing to work with borrowers who can demonstrate financial need. Here are some options to consider:
- Negotiate with the Lender: Contact your loan issuer and discuss your financial situation. They may be open to temporarily lowering your payments or offering alternative repayment plans.
- Refinancing: If you have good credit and a history of on-time payments, refinancing your private student loan can help you secure a lower interest rate, reducing your monthly payments.
- Balance Transfers to Credit Cards: Using a credit card with a 0% APR introductory offer or a card with rewards or cashback benefits can help you manage your debt more flexibly and save on interest. However, be mindful of fees, limits, and the potential for higher APRs after the introductory period.
General Tips:
- Extra Payments: Consider making extra payments towards your student loans when possible. While it won't reduce your monthly payment, it will help shorten the loan term.
- Credit Score Impact: Student loans can impact your credit score. Making timely payments helps build a positive credit history and improves your score over time.
- Review and Adjust: Periodically review your repayment plan to ensure it aligns with your financial situation. If adjustments are needed, contact your lender to discuss alternative options.
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Credit score impact
Student loans can impact your credit score, depending on how you repay them. While you're in school, student loans are typically registered as "in deferment", meaning repayment is suspended, and they won't impact your credit score. However, once repayment begins, your payments become part of your credit history and are recorded in your credit report, which is used to calculate your credit score.
Making full and timely payments as agreed with your lender helps build a positive credit history, improving your credit score over time. Additionally, paying off student loans with a credit card can have benefits, such as reducing your credit utilization ratio, which accounts for up to 30% of your FICO® credit score. It can also lead to a more favourable APR and a lower interest rate during the introductory period.
However, credit card interest rates are typically higher than student loan rates, averaging nearly 17%. Transferring your student loan balance to a credit card may result in accruing interest rapidly and paying fees to your lender. Moreover, consistently missing payments or defaulting on your student loans can significantly lower your credit score, with negative marks potentially remaining on your credit report for up to seven years.
When considering paying student loans with a credit card, it's important to weigh the benefits against the potential drawbacks to make an informed decision.
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Rewards and cash-back cards
The Chase Freedom Unlimited® card is a popular choice for those looking to pay off student loans. It offers 5% back on travel purchased through Chase, 3% back on dining and drugstore purchases, and 1.5% back on all other purchases. The card has no annual fee, and the cash back can be transferred into points if you also have a card in the Ultimate Rewards family, such as the Chase Sapphire Preferred® Card.
The Citi Double Cash card is another option, offering 2% cash back on all purchases (1% when you buy and 1% when you pay your bill). This card also offers 5% total cash back on hotel, car rental, and attraction bookings made on the Citi Travel portal. The Citi® Diamond Preferred® Card is another option from the same issuer, offering a 0% intro APR on balance transfers for 21 months.
The Bank of America® Premium Rewards® credit card is a good choice for Bank of America customers, offering 25%-75% more bonus points, which can be redeemed at a rate of one cent each. The card does carry a $95 annual fee, but this is offset by an up to $100 airline incidental statement credit issued annually.
The Capital One Venture Rewards Credit Card is another option, earning 2 miles per dollar spent on all purchases.
Other options include the Amex Blue Business Plus, which is a good choice for business owners or those with a side hustle, and the SoFi Credit Card, which offers up to 3% cash back for a year when you set up a direct deposit with SoFi.
It is important to note that not all student loan servicers accept credit card payments, and some may charge additional fees for doing so. It is also crucial to make sure that your credit card payments post as purchases rather than cash advances, as these tend to carry higher interest rates and have no grace period.
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Frequently asked questions
Yes, you can use a credit card to pay off your student loans, but it may be complicated and costly. You can use a balance transfer credit card, a cash advance, or a special repayment plan negotiated with your lender.
Using a credit card to pay off your student loans can offer more flexibility in determining your repayment schedule. It can also help you build a positive credit history and raise your credit score over time. Additionally, if you can find a credit card with a 0% APR promotion, you can pay off your student loans without accruing additional interest.
Credit cards typically have higher interest rates than student loans, so you may end up paying more in interest charges over time. Additionally, balance transfers often have limits on the amount you can transfer, charge fees, and apply higher APRs once the introductory period ends.
Alternative ways to pay off your student loans include making extra payments when you can, refinancing your student loans to get a lower interest rate, and consolidating your loans. You can also explore federal repayment options such as extended repayment, graduated repayment, or income-based repayment plans.
