If you are burdened with student loan debt, you are one of 43 million Americans with the same problem.
The total amount owed on student loans is enormous: more than $1.5 trillion according to the Federal Reserve. That means the average student loan borrower owes $35,000.
Can you use a credit card to help pay that debt while scoring the rewards that many credit cards offer? The answer is that you might, although there are many caveats.
Is Paying Student Loans With a Credit Card Allowed?
First of all, know that the Treasury specifically prohibits paying student loans directly with a credit card.
But if you stand to gain a lot in credit card rewards, such as credit card points or airline miles, there are three ways you might be able to pay student loans with credit card anyway:
If you can find a balance transfer credit card with a 0% introductory interest rate, you may be able to transfer some or all of your student loan balance to the card. But that transfer has a cost. “There’s typically a balance transfer fee of 3 to 5%,” says Lauren Anastasio, CFP, who provides financial advice to clients at online lender SoFi. “That’s a fee you’re paying on top. And usually, if you calculate the value of your rewards, you’re paying more in fees than the value of the incentives you’re receiving.”
If you can’t do a balance transfer, convenience checks are an alternative. They are checks drawn against your credit limit, instead of against your bank account. Your student loan servicer should accept the check just like any other form of payment. But convenience checks still mean you’ll have to pay back the money, and they almost always come with fees of 3% to 4%.
You also have the option to use an intermediary, such as Plastiq. “There are some third-party companies that allow you to make a payment to them, and then they make a payment to your student loan company. But there’s always going to be a transaction fee with that,” says Ryan Law, CFP, Board President of the Association for Financial Counseling & Planning Education® (AFCPE), a nonprofit organization that trains and certifies financial professionals. Plastiq says it charges a fee of 2.85% for credit card transactions.
That said, the considerations that should go into your decision are “much bigger than just getting a bunch of airline miles,” says Rod Griffin, Senior Director of Consumer Education and Advocacy at Experian, one of the three biggest credit reporting companies in the U.S.
Deciding to pay your student loans with a credit card because you are in a financial pinch is generally not advisable.
Payments on federal student loans are frozen, without interest, for the rest of 2020 because of the economic uncertainty due to the pandemic. You can still elect to make payments on those loans, and with interest payment halted, any money you pay would go towards reducing the principal — which in turn lowers the amount you pay interest on.
The only time it makes sense to pay student loans with a credit card is when you can find a no-fee balance transfer card with an introductory 0% APR, then pay off the full card balance right away.
“If you have federal loans, your student loans aren’t currently accruing any interest. This is a time where the loans don’t need to be a huge priority if you’re a federal borrower,” Anastasio says.
What Credit Cards Allow Balance Transfers From Student Loans?
If you opt to transfer some or all of your student loan balance to a credit card, your only sensible option is a balance transfer card with as low a transfer fee as possible (3% to 5% is standard) and a long introductory period with 0% annual percentage rate (APR), the actual cost of a loan.
With student loan rates extremely low right now — and interest deferred through the end of the year on federal loans — only a 0% interest rate would make a credit card an attractive alternative.
The following major credit card issuers accept balance transfers from loans:
Make sure you can pay off the amount you’re transferring to your card before the introductory interest-free period expires. Otherwise, you’ll end up paying high interest on the balance left on the card. “The expectation should be that you’re going to pay off that card as quickly as possible,” Anastasio says.
There’s another important caveat to consider: try to find a card offering rewards on balance transfers. Many credit card issuers don’t — or allow rewards on balance transfers only in specific situations.
What Are the Fees for Paying Student Loans With a Credit Card?
As we’ve mentioned, you’re looking at a 3% to 5% fee for a balance transfer. Convenience checks usually come with a fee of around 3% or 4%. Plastiq, a large third-party service provider, says it charges 2.85% for credit card transactions.
The key question here is whether the fee associated with the balance transfer, convenience check, or third-party service is low enough that it doesn’t cancel out any rewards you’d earn.
If you’re struggling to make your student loan payments, we recommend calling your loan provider and asking about any forbearance and deferment options, as well as restructuring your payments based on your income.
Is It Worth the Fees to Earn the Rewards?
In most cases, it will not be worth the fees you will have to pay just to earn rewards — you could end up having to pay more in fees than any rewards you would accrue. For example, if you have to pay a 3% fee but your credit card only earns 2% cash back, the fee will negate any rewards.
What Are the Risks of Paying Student Loans With a Credit Card?
“Credit card debt mires more people in financial difficulty than student loans,” Experian’s Griffin says.
On top of the fees you’ll likely need to pay to even use a credit card toward your student loans in the first place, credit cards also typically come with high interest rates. You can envision a scenario where you pay a fee to move a student loan balance with an interest rate around 4% to 7% to a credit card, then get stuck with high interest on that balance — 17% or higher is not uncommon. To avoid that scenario, you must pay off the balance before the zero-interest introductory period expires.
It’s also important that you check your credit card statement closely to make sure any balance transfer posts as a purchase, not a cash advance. Credit card cash advances can be very expensive: they come with higher interest rates than purchases, and also usually carry transaction fees.
Plus, a higher balance on your credit card may mean a higher credit-utilization ratio: you’d be using more of your available credit, which means a lower credit score.
On top of all this, you lose flexibility. While student loans — especially federal ones — offer lots of options for borrowers who are struggling to pay their bill on time, credit cards offer far fewer.
Credit cards are far from your only option. Studentaid.gov has a wealth of resources you can explore if you’re looking to find the best repayment strategy, or you’re struggling with your student loan payments.
“In the end,” Anastasio says, “it’s extremely rare that someone would find a scenario where it’s more valuable to incur the fees and the potential impact to your credit in order to generate those [credit card] rewards.”
And if you have debt that incurs a higher interest rate than your student loans, focus on that first. “Before you pay off your student loan debt,” Law says, “I’d make sure you’re paying off your high-interest debt first.”