Buzz
The pandemic has pushed many individuals to consider unconventional ways to manage their debts, such as paying student loans using a credit card. While it is possible, it's generally not the best approach.
Why using a credit card to pay student loans could backfire
Student loan interest rates tend to be lower than credit card rates—averaging around 5.8% versus 15.97%, respectively. Furthermore, late payment fees from student loan companies can be less costly than accruing interest on a credit card balance.
As a student loan borrower, you are entitled to certain protections, which you forfeit when transferring your debt to a credit card. These protections include options such as income-driven repayment plans, deferments, and forbearance. Additionally, student loan payments have been paused until December 31, providing extra relief.
The only valid reason to use a credit card for paying off student loans is to capitalize on rewards points or to transfer your balance to a card with a 0% APR offer, allowing you to avoid interest for a period, usually between 12-21 months. However, this comes with risks: you must be able to pay off the debt before the 0% rate expires. Otherwise, you could end up with higher interest rates than before.
Reward points can only be worthwhile if you consistently pay off your balance in full each month. It's essential to calculate whether the total value of the rewards outweighs any annual fees. Also, carrying a significant balance could increase your credit utilization ratio, damaging your credit score and potentially making it harder to secure favorable loan rates.
Using an intermediary service, for a fee
While federal student loan servicers don’t allow direct credit card payments, you can use intermediary services like Plastiq, though they charge a fee of 2.85%. Some private student loan lenders may accept credit card payments, but these intermediaries will almost always impose a fee, typically ranging from 2% to 3%.
If you're transferring debt to a credit card in order to earn rewards, it's essential that the value of the points outweighs any processing fees. For instance, a 2.85% fee on a $1000 balance would cost $28.50. With many cash-back rewards offering only 1-2%, you'd be losing money in such a case.
Other Choices
If using a credit card becomes a last resort to settle student loans, don't overlook options like forbearance or deferment. For federal loans, you can reach out to the Federal Student Aid Information Center at 1 (800) 433-3243 or visit StudentLoans.gov, where they might help reduce your payments or even explore eligibility for loan forgiveness. For private loans, get in touch with your loan servicer to understand any similar opportunities.
