The pandemic has people exploring debt payment options they haven’t considered before—like paying off their student loans with a credit card. Is it possible? Yes, but it’s generally not a good idea.
Why paying student loans with a credit card is a bad idea
Interest rates for student loans cost less than credit cards, as the average rate is 5.8% compared to 15.97%, respectively. It can also be cheaper to incur a late payment fee from a student loan company instead of paying interest on a credit card.
You also have certain rights as a student loan borrower, and by moving your debt to a credit card you lose out on some robust protections, which include income-based repayment plans, deferments, or forbearance. Also, student loan repayments have been paused till December 31, which offers some additional breathing room.
Typically, the only good reason you’d want to use a credit card to pay off student loans is to take advantage of rewards points or transfer your debt to a card with a 0% APR offer, which would allow you to avoid interest, usually for 12-21 months. Even then, it’s a risk: you need to be in a position to pay this all back before the end of the 0% rate period. If not, you’d be on the hook for the same debt at even higher interest rates than before.
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As for reward points, they’re only really valuable only if you pay your balance in full every month, and you’ll need to do the math and make sure the total value of your rewards isn’t eaten up by annual fees. Plus, if it’s a large sum, maxing out a credit card will increase your credit utilization ratio and hurt your credit score, which can make it harder for you to get good rates on other loans.
Using an intermediary service, for a fee
Federal student loan servicers won’t let you pay with a credit card directly, but you can use an intermediary service like Plastiq, although it comes with a 2.85% fee. Some private student loan companies might accept credit card payments, but like all intermediaries, they will also almost certainly charge a fee (typically 2-3%).
So, again, if you’re moving debt to a credit card to claim points, the reward point value has to be higher than a processing fee. As an example, a 2.85% processing fee on $1000 would equal $28.50. Many cash-back reward categories are only 1-2%, so you’d be losing money in this scenario.
Alternative options
Generally speaking, if using your credit card is a last resort to pay student loans, don’t forget that you have options like forbearance or deferment. For federal loans, call the Federal Student Aid Information Center at 1 (800) 433-3243 or visit StudentLoans.gov, and they might be able to help you lower your monthly payments or even determine if you’re eligible for loan forgiveness. For private loans, contact your loan servicer directly to learn about similar options.
