Get expert advice on whether it’s a good idea to pay your student loans with credit cards. Decide if it’s right for your personal financial situation.
If you’re paying off student loans, chances are you grimace each month when you write that check.
Many other college graduates may be doing the same – 57 percent of young adults feel burdened by their student loans, according to a recent NeighborWorks America national housing survey.
But what if you pay back your student loans with your student credit card and earn some rewards for all that spending? Is that a good idea?
Experts are sharply divided on the question of paying student loans with a credit card. And because some loan providers don’t even offer this option – they require borrowers to make payments via checking or savings accounts – you might not even have to make a decision.
But if yours does, consider the pros and cons and decide what’s right for your personal financial wellbeing before you charge your loan payments.
Pros and cons of paying your student loans with a credit card
Pro: You can save on interest payments
David Gafford, marketing director for Shift Processing – which processes millions in credit card payments each month – believes you should absolutely pay off your loans with cards. But there’s a caveat – make sure you can pay that credit card charge off by the end of the month, when the bill is due, or you’ll end up paying interest on both your loan and your card.
“There aren’t many cases in which the annual percentage rate on a credit card is going to be better than the APR on your college loan, but it is possible depending on the terms of your loan,” Gafford said.
“If you have a good rewards card or cash back card, go ahead and pay off your loan balance or make your loan payment every month on a credit card. Enjoy the benefits of your cash back card for every payment,” he added.
If you have a relatively small loan balance, you can save on interest payments by transferring it to a balance transfer card that has an introductory 0 percent APR deal.
For instance, if you have $5,000 left to pay on your student loan – and one year left to pay it at 7 percent interest – you would end up paying $192 in interest over that time. But a balance transfer card with 0 percent APR for 12 months – the most common length for such deals – would save you that amount. If you have a student loan and want to know how much you’ll pay in interest over time, you can use Bankrate’s student loan calculator.
Keep in mind that most balance transfer cards with introductory APRs require good-to-excellent credit to qualify. And you should confirm with the card issuer and your loan provider before you apply for the card that both parties will allow the transfer to occur.
Con: Your loan provider may pass swipe fees on to you
Although using credit cards and getting rewards might seem attractive, remember that the credit card companies charge the organizations that own the loans “swipe fees” to take payment from them, Kyle Boze, a financial literacy teacher at Kettering Fairmont High School in Kettering, Ohio, pointed out.
Unlike retailers, who just “eat” credit card companies’ costs, student loan institutions transfer those fees to the borrowers.
“These fees can cost from 3-5 percent of your overall loan cost. And a 3-5 percent addition to your payment does not outweigh the typical 1-2 percent you would receive in rewards points,” Boze said.
Pro: You can earn a lot of card rewards
Brad Chase, managing director of Chase Global Travel, said paying a student loan with a credit card depends on two factors – the interest rate of the loan and the individual’s ability to outperform that rate by legally gaming the credit card rewards system.
“Those credit card TV commercials generally promise 1.5 percent cash back rewards,” Chase said.
But, he added, it only takes a little bit of savvy, research and risk-taking to find a card that will give you as much as 5 percent back.
Chase feels that for most people, paying with a credit card works out well because you get rewards points that outweigh the transaction fees.
But if you’re trying to pay off a big student loan debt, it works out only if you can get a big sign-up bonus, a 0 percent interest rate for 12 months or more, or a 0 percent balance transfer to extend your payback period by another six to 18 months, he said.
Con: It can hurt your credit score
William Bradley, co-author of the book, “Winning the Credit Score Game” and owner of the website Credit Score Maestro, cautioned that making a large student loan payment on a card can damage your credit score. This is especially true if you don’t pay back the full balance incurred on your card when you made the loan payment.
Your FICO score will likely take a hit under the credit utilization scoring factor because you’ll be utilizing a large portion of a revolving credit line. Credit utilization – the amount you have borrowed compared to your credit limits – is the second most important factor in credit scoring calculations after making on-time payments. It accounts for 30 percent of your credit score.
“This, in turn, makes you a ‘revolver,’ which in the world of credit is a consumer that carries a balance on a credit card from one billing cycle to another without paying the full amount owed,” Bradley added.
And Bradley cautioned that all three credit reporting agencies frown on revolvers, which is why it’s always best to use your credit cards in a way that enables you to pay off your entire balance each month.
Pro: A card may offer better terms if your loan is private
Tim Marshall, author of the website Forget Student Loan Debt, also thinks it’s OK to pay student loans with credit cards under certain circumstances.
Use your cards if you can get a credit card with a lower interest rate than your loans – which might be possible if you have private student loan debt, but will be next to impossible if you have federal loans – Marshall suggested.
Also, you might decide to use credit cards if you are about to default on your debt and have no alternative, particularly if you’re going to default on private loans.
“You can fix a default on federal debt via the Student Loan Rehabilitation Program, but with private debt, once you default it can be impossible to get back into repayment status,” Marshall said.
Con: Cards offer little relief if you can’t make on-time payments
Jay Fleischman, an attorney who deals with student loan resolution, consumer bankruptcy and debt collection issues, has an interesting perspective on why you shouldn’t pay student loans with credit cards.
“Federal student loans have various repayment and forgiveness options to help you manage your finances during tough times, but when you pay those loans with a credit card, you lose those protections,” Fleischman said.
“If you qualify, the interest you pay on your student loan is tax-deductible. In addition, if you lose your job or have a hard time paying off your student loan(s), you can apply for a deferment – but not if you pay with credit cards,” Marshall Armond, CEO of the website CreditRevo, said.
Decide for yourself
Now that you’ve explored experts’ yeas, nays and maybes regarding paying off student loan debt with credit cards, make your own decision.
Determine what’s most important to you.
- Is it earning a lot of credit card rewards?
- Can you find better terms with a card than your loan offers?
These are all reasons to explore paying your student loans with credit cards.
- If, however, you decide to use cards and you can’t pay off the balance each month, are you OK with the possibility of that dinging your credit score?
- Are you willing to give up the repayment and forgiveness options federal student loans provide when you use credit cards?
If your answer to these questions is no, you’re likely better off not using credit cards to pay your student loans.
Apply the experts’ advice to your own financial situation and do what makes the most sense for you.