Though it may sound tempting, as the average person with student loan debt has about $30,000 of it, paying with a credit card is a bad idea long-term. It is technically possible to do this, but it comes highly unrecommended by any financial professional.
What Happens When You Try to Pay Loans with a Credit Card?
First off, federal student loan services don’t let you pay directly with a credit card; you must use an intermediary, which is essentially a middle man for lenders and buyers. The private loan services let you pay directly, but there is often a sizeable fee for doing so.
When you pay student loans with a credit card:
- You give up student loan protections
- Includes consolidation, deferment, forbearance, or loan forgiveness
- Potentially move your debt to a credit product with an even higher interest rate than your student loans
- Credit card rates sun substantially higher than student loan insurance rates—sometimes by 20% or more
- You will likely be charged a fee (with interest)
Credit card companies do not design plans that let you pay off debt quickly because it is not lucrative. If you make a student loan payment and don’t pay it off by the time your credit card bill comes, you’ll be charged for interest both through the card and the student loan service.
What are the Best Ways to Use a Credit Card to Pay off Student Loans?
Some cards offer cash back rewards points that you can then use towards your student loans:
- Look for cards with long-term cash back benefits (these are best for people with excellent credit)
- If you are paying through an intermediary, make sure your credit card’s rewards program exceeds the intermediary’s fee
- For example, Plastiq has a 2.85% fee for every transaction, so your card’s rewards program would need to be greater than 2.85% of your total payments
- As most cards only give 1% to 2% on your purchases, this is fiscally unwise
You also have the option of making a balance transfer, which moves your payment over from the student loan lender and the credit card company.However, you do not often earn rewards with balance transfers.
- Though you could get a temporary 0% interest rate, it often just buys time until you would have to pay even higher interest
- Another downside to doing a balance transfer is that there is, of course, a fee—usually near 5%!
If a balance transfer isn’t an option, another is to use a convenience check:
- These are drawn against your credit limit instead of your bank account
- The student loan service processes this similarly to any other payment
- But, you’ll still have to repay the money, and fees start at 3% to 4%
The only time it makes logical sense to pay your loans with a credit card is if you are, beyond a shadow of a doubt, able to pay off your balance in full every month. Or, if you find a card with a no-fee balance transfer that starts off with a 0% APR (annual percentage rate; the amount you pay each year to borrow money) financing, you may also benefit from this practice.But again, this must be paid off immediately lest the costs outweigh the benefits—make sure to stay on top of your loans and credit to avoid paying even more in the long run!