It is possible to pay your student loans with a credit card, but you will almost certainly need to use a third-party service to do so. Still, the possibility of rewards exists, and there are other advantages to using plastic to pay your bills.
However, there are some disadvantages. When you pay bills with a credit card, you risk accruing significantly more interest over time, among other things.
It’s probably not a good idea if you don’t have enough money to pay your credit card bill in full after making a student loan payment. Whereas many student loans (both federal and private student loans) have interest rates of less than 5%, the average credit card interest rate is well over 19%. And, with seven in ten Gen Z and millennial student loan borrowers delaying a major financial decision due to debt, according to a 2022 Bankrate survey, it’s critical to avoid adding to your credit card debt.
The dangers of using a credit card to pay off student loans
Using credit to cover regular expenses can be beneficial, but there are risks involved, such as:
Fees are costing you money
Most credit card companies do not allow you to pay your student loans with a credit card. As a result, you’ll have to think outside the box when it comes to paying with plastic, and you may have to rely on a third party to complete the transaction. Third-party fees can increase the amount you owe and cancel out any benefit from not paying directly.
Accumulating significant debt
If you rely on credit too much, you may end up with credit card debt that you can’t get rid of. Because the average credit card APR is high, you risk starting a debt spiral that will be difficult to break.
Possible harm to your credit score
Your credit utilization ratio accounts for 30% of your FICO credit score, and accumulating debt on revolving accounts (such as credit cards) can cause this rate to rise quickly, resulting in a drop in your credit score.
Missing out on tax breaks and benefits
Paying your federal student loans directly also provides benefits that you would lose if you paid them off with a credit card. You can deduct up to $2,500 in student loan interest on your federal income tax returns, lowering your overall tax burden. If your modified adjusted gross income (MAGI) exceeds certain IRS limits, you may not be eligible for this deduction. Speak with an accountant before transferring your loan to a credit card, as interest payments on personal credit cards are not tax-deductible.
Consumer protections for federal student loans are being phased out
Federal student loans also provide some financial protection in the form of deferment or forbearance. If you are unable to repay your loan, you may change your repayment plan. An income-based repayment plan, as an alternative to federal student loans, offers variable payments based on your income, which is ideal for recent graduates who are job hunting or taking advantage of the gig economy while looking for work in their field of study.
Potential advantages of using a credit card
The advantages of paying your student loans with a credit card vary depending on the individual, but here are the main ones to consider:
Earn points for your purchases
When you pay your student loans and other bills with a rewards card, you can earn points and miles on those purchases. Just keep in mind that any fees you pay will deduct from the rewards you earn.
Purchase some time before your payment is due
Paying with a credit card can buy you some extra time before you have to make a payment, which can be useful when money is tight.
For a limited time, enjoy 0% APR
Paying eligible student debt with a credit card may help you save money on interest if you can get an introductory 0% APR. You could save money if you use the card to pay your student loan and then pay off the balance during the intro APR period.
Should you use a credit card to pay off your student loans?
Despite the fact that there are numerous disadvantages, credit cards can be used to pay off student loans and other bills. It is entirely up to you whether or not it is a good idea, but if you do not already have the cash in hand to make a payment, it may be best to avoid this method.
If you choose this path, you will need to take some additional steps. Here are a few ideas to consider when devising a repayment strategy:
Examine your credit report
To begin, obtain copies of your Equifax, Experian, and TransUnion credit reports from AnnualCreditReport.com and correct any errors to improve your chances of credit approval. Then, review the cards available in your credit range and check your credit score to see where you stand.
Consider a card with rewards or a 0% APR
If you already have a student credit card and have been using it to build credit, you may be able to qualify for a rewards card that will increase the value of your rewards. While student credit cards are great for building credit, earning student-centric rewards, and other perks, their low credit limits and high interest rates can be restrictive.
Consider credit cards with 0% introductory APR offers to reduce your interest payments when you use your new credit card to pay off your student loans. You’ll typically need a good-to-excellent credit score to qualify, but if you do, many cards in this category will allow you to earn points or cash back.
Make a budget for your loan payments
Once you’ve been approved for your new card, start paying off your student loans a few days before the due date. Payments made with a convenience check or Plastiq may take longer than direct payments. Follow up to ensure the payment process went smoothly.
Create a budget to pay off your loan before the promotional period expires if you’re paying with a 0% APR card. After that, the regular APR takes effect, and any remaining balance begins to accrue interest.
If you’ve chosen a rewards credit card with cash back, you might want to apply your earnings to your statement balance to pay off your debt faster.
While it is technically possible to pay your student loans with a credit card, it is not recommended. Unless you have the cash to pay your balance in full each month, it’s usually best to avoid credit cards, so try to avoid this option if possible. If you’re having trouble making student loan payments, keep in mind that you have options. You can change your repayment plan or refinance your student loans to get a lower interest rate, a lower monthly payment, or both.