If you have student loans, you may be exploring different payment options, and you may even wonder if you can pay student loans with a credit card. If you have a credit card with 0% APR or gain rewards, it may seem beneficial to you.
That said, you typically cannot pay student loans with a credit card. The loan provider will likely require you to make a payment directly from your bank account, which eliminates the chance to pay with credit.
It is possible, though, to use a third-party payment service or even a line of credit to pay student loans. That doesn’t mean it’s always your best option. In fact, when you pay student loans with a credit card you may incur additional risks like more fees and higher interest rates.
Before you decide to pay student loans with a credit card, it’s important to evaluate exactly what it will entail and see if it makes good financial sense to do so. Our recommendation is that you avoid it whenever possible.
Can You Transfer Student Loans to a Credit Card?
One popular way to pay student loans with a credit card is through transfers. In most other cases, it’s not possible to pay with a credit card because the lender doesn’t allow it.
For example, if you’re wondering if you can pay federal student loans with a credit card, the answer is a clear no. They won’t allow any payments directly on the platform with your card. You’ll need to link your bank account and pay via ACH transfer.
The only way to pay with a credit card is to use a third-party payment provider like Plastiq, which will help to perform the payment. Of course, these types of services will come at a cost, charging you a fee.
If your loan provider is a private company, they may allow you to pay student loans with a credit card, but you’ll have to verify whether it’d be possible as well as any fees that come along with it. Because it costs lenders money to accept credit card payments, it’s one of the main reasons it’s not allowed.
The lender may consider making an exception if you are backed up on your payments and have no other options.
As far as transfers go, some credit card issues allow student loan balance transfers. Many balance transfers offer low APR rates as an incentive for getting the balance over, so in some cases it could be a positive thing.
Some credit card companies will also provide you with convenience checks to make cash advances which could also be used to pay credit cards; unfortunately cash advances are charged with a higher APR. You also aren’t likely to earn rewards on your credit cards through balance transfers or cash advances.
Is it a Good Idea to Pay off Student Loans with a Credit Card?
More often than not, student loan borrowers should not pay student loans with a credit card. You’ll give up your loan protections and potentially extend your debt payoff time with a higher interest rate and fees.
It’s not cheap nor convenient to pay off student loans with a credit card; it’s a hassle and ends up being more costly in the long run. Below are three factors that can help you understand why credit cards aren’t the best option here.
As we mentioned above, in most cases you won’t even be able to pay your student loans with a credit card, and you’d have to enlist the help of a third party app to do so, which costs more. In addition, taking a cash advance on your credit card to pay your loans will end up costing you more as well.
You’ll not only be paying any interest the loan has accrued, but you’ll also be paying interest on the cash advance, which increases the cost quite a bit. Balance transfers may also have a fee, leaving very few options for simple and affordable credit card payment options.
Fees are one of the main reasons you shouldn't pay student loans with a credit card.
In comparison with other loans, student loan interest rates are generally much lower than the average credit card interest rates.
For instance, direct federal student loans at the undergraduate level disbursed after July 1st, 2020 have an average interest rate of 2.75%. It was even set to 0% during the COVID-19 pandemic, which is something you would have missed out on had you moved your loan to a credit card.
This 2.75% is compared with the average credit card APR ranging from 15%-23%, which means you’ll save quite a hefty chunk on interest when you don’t pay student loans with a credit card.
There are a multitude of protections that your student loan offers you innately, including consolidation, deferment, forbearance, and even loan forgiveness, especially if your loans are federal student loans.
If you move your student loan balance to a credit card, you will effectively relinquish all of those protections. This includes options for death discharge, disability discharge, and the right to cure default.
Does it Make Financial Sense to Use a Credit Card to Pay Student Loans?
In almost all situations, it doesn’t make sense to pay student loans with a credit card. There are only two instances in which it might be a viable option.
If you have a credit card with 0% introductory APR, you may be able to use it to pay your credit card. Even with low interest on student loans, 0% is always the best option. If you transfer your student loan balance, or even just a part of it, you may avoid accruing interest during the intro terms of 0% APR.
The term could range anywhere between 6 to 24 months depending on the card issuer and terms.
That said, you need to be extremely careful— if you don’t pay off the total balance transferred before the intro APR period is over, you’ll need to pay interest on the remaining balance, which is likely higher than what your student loan interest rate was.
Keep in mind that not all balance transfers are free. You might have to pay a transfer fee of 3% to 5%, which is going to negate the savings that you had on interest. It doesn’t make sense to transfer your student loan to a credit card if the interest rate is virtually the same on both.
You’ll also have to confirm that your credit card issuer will allow this type of transfer, as it’s not always permitted.
Some credit card companies also offer rewards, so if you pay your student loan with a credit card that has a rewards program, you can earn points, miles, cash back, etc., just as you would with purchases.
It sounds like a great option, but remember that most student loan issuers don’t accept credit card payments directly, so you’ll need to use a provider. If the fee to pay student loans with a credit card is 2.5% and your reward is 2% cash back, you won’t be getting anything at all.
One good offer from some credit cards, like the Citi ThankYou Preferred Card, allow rewards to be redeemed in the way of student loan payments. That means you could pay your student loans with a credit card that offers those rewards.
Cash back rewards can also be used to pay your student loan. The credit card rewards program will deposit the funds into your bank and you can then pay the loan. Sometimes, cash back rewards are offered in Visa or Mastercard gift cards, so you should double check with the credit card company.
What to Consider When You Pay Student Loans with a Credit Card
If you have no other alternative and have to resort to pay student loans with a credit card, be sure to keep the following five things in mind.
- Get preapproved before applying: only apply for credit cards that you are likely to be approved for and can meet your needs. Remember, when you apply for a credit card, this impacts your credit score. You can get a preapproval to see first if you’re likely to be accepted and what credit limit you’re likely to receive.
- Avoid maxing out your credit card limits through student loan balance transfers: Let’s say that you have $50,000 in student loan debt. If you are approved for a credit card with a $5,000 limit, that’s all you’ll be able to transfer. The remaining $45,000 will stay on your student loan account. This means you’ll then have two monthly payments that you need to make. In addition, you’ll have a higher credit utilization rate. It’s not recommended to use more than 30% of your total available credit, and if you transfer your student loans, you may see that your credit score drops.
- Avoid annual fees: Always inspect the credit card terms in detail. Many credit cards have annual fees, which will increase the amount of money you pay in the end. Look for a credit card with no annual fees. If you can’t find one or you have no other options, ensure that you’ll still save more than you’ll be spending when you pay student loans with a credit card. Otherwise, you’ll be at a loss.
- Select a credit card with the lowest possible APR: You should always seek to obtain the credit card with the lowest APR, even if you are going to pay your balance in full before the interest kicks in. Firstly, you never know if something will come up. If you get off track with your payments, you’ll still have a low APR if you didn’t pay them off in time. Secondly, after you finish paying the palance, you’ll be able to enjoy a lower rate for future use of the credit card.
- Pay at least the minimum payment every single month: Don’t try to pay student loans with a credit card if you can’t make the monthly payment. This will hurt your credit score and will get you in trouble with past due payments, more fees, and potentially collection accounts. Penalty APRs may also go into effect, often surpassing 29.99%.
Should You Pay Student Loans with a Credit Card?
At the end of the day, it’s not a good idea to pay student loans with a credit card. Factors like credit card fees, potentially high APRs, limitations on payment processing, and loss of student loan protections make it an unattractive option.
If you find yourself to be in a difficult situation and unable to make your student loan payments, it’s advisable to discuss your options with a professional. Credincrease can help you to find the best payment options for you through credit repair and analysis.
That way, when you find yourself in a tough spot, you’ll have more options available to you instead of being stuck having to pay student loans with a credit card.