If you have student loans, you may be tempted to consider paying them off with a credit card. After all, you can’t earn rewards or take advantage of 0% introductory annual percentage rate offers. However, paying with a credit card sets you up to take on some big risks – you’ll be subject to fees and higher interest rates if you leave out certain protections.
Can you transfer student loans to a credit card?
Before you consider whether it’s a good idea to pay off student loans with a credit card, find out if it’s possible.
For one, federal student loan servicers won’t let you pay directly by credit card — you have to use a payment service like Plastiq, which acts as an intermediary for fees. And if private student loan companies let you pay off student loans with a credit card, they may also charge a transaction fee.
“It costs lenders money to accept credit card payments, so they don’t like to do it,” says Michael Laux, founder of The Student Loan Sherpa, a student loan education, strategy and advocacy site. But lenders can make exceptions if you’ve fallen behind and otherwise can’t make payments.
Some credit card issuers offer student loan balance transfers or convenience checks for cash advances that can be used to pay off student loans. However, convenience checks are not balance transfers and typically carry interest at the cash advance APR, which is usually higher than the standard APR. Don’t count on earning credit card rewards with balance transfers or convenience checks.
Is it a good idea to pay off student loans with a credit card?
For most student loan borrowers, it doesn’t make sense to pay off student loans with a credit card. When you pay off student loans with a credit card, you give up student loan protections and potentially move your debt to a credit product with a higher interest rate than your student loan. Plus, you’ll likely incur fees to do so.
Fee
If you are using the service to pay by credit card because your student loan company does not accept cards directly, there is a transaction fee. Credit card facility checks also come with fees and interest. Balance transfers also typically incur fees.
Safeguards
Student loans typically offer consolidation, deferment, forbearance, or loan forgiveness options, especially if you have federal student loans. Those protections no longer apply to student loan balances transferred to credit cards. “If you have federal student loans, you lose options for death discharges, disability discharges, and the right to cure defaults,” says student loan attorney Adam Minsky.
Interest rates
Student loan interest rates are much lower than credit card rates. For example, federal Direct Student Loans for graduate loans disbursed after July 1, 2020, typically have an interest rate of 2.75% (which is 0% until December 31, 2020, due to COVID-19 relief measures).
Compare that to the average credit card APR of 15% to 23%, and it’s clear that you can save interest without moving student loan debt onto credit cards.
When does it make sense to use a credit card to pay off student loans?
There are two scenarios where paying off student loans with a credit card can be beneficial.
Balance Transfer
Balance transfer cards with 0% introductory APR offers can be a good option for paying off student loans with a credit card. Although student loan interest rates are generally lower than rates on credit cards, nothing beats 0% 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 for the first six to 21 months, depending on the card’s terms.
But this only works if you’re careful and don’t transfer more student loans than you can pay off before the introductory APR period ends. If you don’t pay the balance in full before the end of the introductory period, you’ll pay interest on the remaining balance.
Another consideration is balance transfer fees, which can eat into your interest savings. Some credit cards offer balance transfers for no fee or for an introductory period, but you’ll likely pay a balance transfer fee of 3% to 5%. If your student loan interest rate is higher than that, you may see savings. But if you have a student loan interest rate at or below the balance transfer fee rate offered by your credit card, it doesn’t make sense to transfer your balance.
And of course, you need to make sure that your credit card issuer accepts student loans for balance transfers, as not all do.
Rewards
When you pay off your student loans with a rewards credit card, you can earn points, miles or cash back – just like you do on other purchases. However, if a credit card requires fees to pay off student loans, you may end up paying more in fees than you earn in rewards. For example, if you pay a 2.5% fee to use your card but only earn 2% cash back on transactions, you won’t come out ahead.
Additionally, some cards, such as the Citi ThankYou Preferred Card, allow you to redeem your rewards for paying off student loans.
You can also use cash-back rewards to pay off student loan balances. Although it’s unusual to offer student loan payments as a direct redemption option, you can redeem cash-back rewards by check or direct deposit into your bank account. With the prize funds in your bank account, you can pay your student loan issuer.
Additional factors to consider when paying off student loans with a credit card
Make at least the minimum payment each 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%.
Don’t max out credit card limits with student loan balance transfers. You can only transfer as much balance as you qualify for. If you have $20,000 in student loans but only qualify for a $10,000 credit limit on a balance transfer card, you’ll only be able to transfer $10,000 to the card.
The remaining $10,000 will remain in your student loan balance. Be aware that using more than 30% of your credit limit is not recommended, as a high credit utilization rate can lower your credit score.
Get pre-approved before applying. You should only apply for credit cards that meet your needs and that you think you will be approved for. A pre-approval can give you an idea of whether you will 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. Pre-approvals protect your credit rating because they are a soft inquiry that doesn’t affect your credit, unlike the hard check done when you submit a full application.
Avoid annual fees. Annual fees can eat into any savings you realize from using a credit card to pay off 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 you save at least as much as the annual fee when you pay off student loans with a credit card.
Choose a credit card with the lowest APR possible. If you plan to pay off your balance in full before interest is applied, it’s a good idea to look for a card with a low APR in case your payments don’t go according to plan.
Should you pay off student loans with a credit card?
Credit card fees, the loss of student loan protection, and the risk of transferring low-interest student loan debt to potentially high-interest credit cards make paying off student loans with a credit card a bad idea for many people.
For students in difficult financial situations, Locks recommends finding a solution that works for the long term. This could include refinancing student loans 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 open yourself up to big problems in the future,” he says.