Student loan debt is currently one of the most common types of consumer debt in the United States. According to figures from the US Department of Education, around 42 million Americans have student loan debt totalling approximately $1.59 trillion as of 2021. 1 In 2021, the typical student graduated with around $39,351 in student loan debt. 2
Wouldn’t it be lovely to get credit card points while repaying tens of thousands of dollars in the coming years? Receiving 1% back would put money back in your pocket.
- Borrowers may not use credit cards to pay their student loans, according to the US Treasury Department.
- Transferring student loan debt on a credit card to pay them off may be viable. These sorts of transfers are not permitted by all credit cards, but some do.
- If you’re having difficulties paying your student loan payments, it’s not a good idea to move the loan debt to a credit card.
- Make sure your credit card issuer does not classify your payback as a cash advance.
- Repaying a college debt should improve your credit score.
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How To Get Out Of Paying Your Student Loans
Can You Pay Student Loans With a Credit Card?
The United States Treasury Department no longer accepts credit card payments for student loans. Despite this, some individuals attempt to move their student loan balances to a (cash rewards) credit card. 3
However, there are a few things you should think about before transferring funds from your student loan lender to your credit card provider. Let’s see whether you can earn credit card points for paying down your student loans, how to do it, and if it’s a smart idea.
If you work with a student loan servicer that takes credit card payments for no or minimal fees (or is prepared to waive the cost), you may be able to earn considerable cash back by using your credit card to pay your loan. It also depends on whether or not you always pay your credit card account in full each month.
Getting the Right Card to Transfer With
First, you must apply for and get accepted for a credit card that offers a substantial sign-up bonus as well as continuous cash benefits. Look for a $500 cash back offer after spending $5,000 (or more) in the first three months of card membership, plus 1% back on all transactions. These cards are often designated for persons with outstanding to very good credit.
Keep in mind that not all credit cards are made equal, which means that not all cards enable you to transfer your loan amount. As a result, you must ensure that you have the correct card. Bank of America, Capital One, Citi, Discover, Pentagon Federal Credit Union (PenFed), USAA, U.S. Bank, Wells Fargo, and SunTrust Bank are among the institutions that allow students to transfer their student loan balances to their credit cards. In addition, several of credit cards offer 0% APR on balance transfers for a certain period of time.
SunTrust’s Prime Rewards card is one of the top balance transfer cards with a three-year 0% APR as of 2021. 4 Furthermore, Bank of America’s Travel Rewards card and Capital One’s Quicksilver Cash Rewards card are among the top rewards cards, both of which provide 0% APR for 15 months and will be available in 2021. This card will be used to make a large, one-time supplementary payment on your student loan. 56
Then, before you make the payment, ensure that your credit card company will not classify the transaction as a cash advance—and obtain that assurance in writing. Also, notify your credit card company ahead of time that you will be making a significant purchase so that it is not refused or labeled as fraudulent.
What Happens After You Make a Payment?
After you’ve made the payment, keep a watch on your credit card account to make sure the transaction shows up as a purchase rather than a cash advance. If everything goes as planned, you’ll satisfy the conditions for the sign-up bonus as well as receive 1% back. You should then pay your credit card bill in whole and on schedule to prevent interest or late penalties.
This technique will help you achieve three financial objectives at once: reducing your student loan principle debt, saving all of the interest you would have spent on that principal over time, and collecting big credit card points.
And, if you’re fortunate enough to have a student loan servicer that takes credit card payments of any amount without a charge, there’s no reason not to pay your student loan bill with your credit card every month, as long as you don’t carry a credit card debt.
Read the Fine Print
Before you complete the transfer, make sure you understand your card’s restrictions as well as the terms and conditions. To begin, ensure that you can only transfer as much as you can afford to repay to the credit card provider. Don’t overspend to gain the points or incentives if you can’t fulfill your credit card’s minimum payment obligations.
Second, keep in mind that if you undertake a balance transfer, you may be charged a higher interest rate. If you are unable to make the complete payment at the end of the statement month, you may be paying a greater interest rate than if you made a conventional purchase transaction. If you have a new card, you may be able to take advantage of low- or no-fee balance transfers for the first six to twelve months.
Set money aside to pay off your outstanding credit card bill so that you don’t wind up swapping low-interest debt for high-interest debt.
How to Make Your Payment
Can’t transfer your balance? For a convenience check, contact your credit card provider. This will be written in the same manner as a check from your bank account, but it will be drawn on your credit card. But bear in mind that convenience checks might have a high interest rate, so you’ll want to know what the rate and fees are.
You may also use third-party payment processors such as PayPal, Stripe, Plastiq, or Square. These systems will charge your credit card and then send a check or wire transfer to your student loan provider. However, be aware that you may be charged a price for utilizing their services. Some of them charge a percentage of the payment amount, so you should know how much extra you’ll have to pay. Some of these businesses may provide incentives, discounts, or cheaper fees.
If you are having difficulty paying your student loan payments, you might consider refinancing or altering your repayment plan.
Know What You’re Getting Into
If you regularly carry a credit card debt, using your credit card to make student loan payments makes little sense. In general, student loan interest rates are lower than credit card interest rates. So, if you’re having difficulties paying your student loan payments on time, it may be less expensive to pay a late payment charge to the student loan provider rather than accrue interest on a credit card.
You may also forfeit any student loan debt safeguards. As a student loan borrower, you have specific privileges that you do not have with credit cards. Consider some of your student loan repayment alternatives, such as income-based repayment plans, payment deferments, and even forbearance. These alternatives enable you to suspend making payments while the loan’s interest continues to accumulate, and they are not accessible to credit cards.
Will It Hurt Your Credit Score?
Paying off a significant portion of your student loan with a new credit card might benefit your credit score in a variety of ways. Applying for a new credit card can lower your credit score briefly. The increase in your overall available credit from the new card’s credit limit, on the other hand, may assist enhance your score. Paying down your student loan load might also help your credit score.
Charging a significant payment that exceeds 30% of your new card’s available credit will harm your credit score7; however, if you pay up the charge before your statement is released, the huge amount will not be recorded to the credit agency and will not harm your score. Your on-time bill payment will boost your credit score.
These are broad rules for how credit bureaus believe certain behaviors impact borrowers’ credit ratings. FICO warns that various acts will have varied effects on individual customers’ credit scores, depending on the overall picture of their credit profile. 8
The Bottom Line
Many student loan providers will not allow you to pay your student loan using a credit card, will charge you a fee, or may restrict the amount you can charge. These limitations are in place to save lenders money on credit card processing costs and to prevent customers from converting low-interest student loan debt into higher-interest credit card debt.
However, if you have good credit-card habits, a chunk of extra income to pay off your student loan, a wonderful rewards credit card, and a student-loan lender that accepts credit card payments without charging a charge, you may come out ahead by using your credit card to make student loan payments.
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