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Can You Pay Student Loans With a Credit Card?

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can you pay student loans with a credit card

You can’t pay student loans using a credit card, but there are some walk-around ways for you. But it’s important to know that a considerable risk could be associated with using credit cards to pay for student loans. 

Using a credit card to pay off federal student loans may be impossible because federal regulations prohibit it. However, you may be able to use credit to pay your private student loans. Every credit card transaction involves processing fees paid by the party that accepts the card as payment; lenders certainly aren’t going to pay those extra fees.

To pay off a student loan using a credit card, you must involve some third-party services — such as Plastiq, which allows you to make an ACH transfer, check, or wire transfer, and credit cards. Also, remember that these third-party services charge extra fees, which may amount to 2.85% on most transactions. 

This post will discuss the potential risks and benefits of paying student loans with a credit card and helpful tips to help you make the right decisions.

How to Pay Off student loan Using a credit card?

There are two basic ways to pay Off your student loan using your credit card:

  1. Using a third-party services payment: Some companies will take your credit card payment and then pay your loan servicer or lender on your behalf. It could be one way to pay with a credit card on a month-to-month basis, but these services typically charge you a fee for each transaction.
  2. Credit card balance transfer: In some situations, you might be able to transfer the balance of your loan to a credit card with a low-interest rate. You could then make payments on the card instead. Balance transfers may come with a fee. And low rates may not be permanent.

Can I Transfer My Student Loans to a Credit Card?

Of course, you can transfer your student loan to a credit card; this sometimes reduces your interest payments. Many balance transfer cards offer introductory APRs at or near zero percent, but usually within your first 12 or 18 months as a cardholder, after which you may be charged according to your card issuer fees.

The Risks of Paying Student Loans With a Credit Card

The risks/drawbacks of paying student loans with a credit card include the following;

  • Higher Interest rates: Using a credit card to pay for a student loan will be charged the higher APR of a credit card instead of the lower interest rate of a typical student loan. For example, federal direct student loans for undergraduate borrowers disbursed after July 1, 2020, typically have a fixed rate of 4.99% for undergraduates and 6.54% for graduate or professional students.
  • Higher Fees: Paying student loans directly with your credit may seem impossible; however, you may have to use a third-party payment to facilitate the transaction. This third party charges you a fee that adds up to the amount you owe.
  • Taxes: Paying down federal student loans normally allows you to deduct student loan interest from your federal income tax returns. Some private loans may qualify too. But interest payments on credit cards aren’t tax deductible.
  • It may affect your credit score: Using your credit card to pay off student loans could affect your credit score. As you move your student loans to credit cards, you reduce your credit utilization ratio, which factors for up to 30% of your FICO® credit score.
  • Can’t negotiate your student loan with Potential lenders: Most lenders charge higher fees due to the extra cost charged by credit card providers. Lenders try as much as they can to avoid all those extra costs. However, lenders may make exceptions if you’ve fallen behind and can’t make the payment.

Also Read: What Increases your total loan balance?

What Are The Potential Benefits of Paying With a credit card?

  • Earn rewards on your spending: When you pay your student loan with a rewards credit card, you can earn points and miles on purchases or cash back. Some cards, such as the Citi ThankYou Preferred Card, allow you to redeem your rewards which can be used to pay off student loans. Also, you could use cash-back rewards to pay down student loan balances by simply redeeming the cash-back rewards and depositing them into your bank account.
  • Credit cards are more flexible: Credit cards offer the flexibility to pay for a student loan conveniently; you may be offered a minimum balance that aligns with your current needs and receives a more favorable APR. 
  • Stand a chance to get overdue payment: Paying with a credit card can buy you some more time until you need to make a payment, which can be helpful when money is tight.
  • Secure 0 percent APR for a limited time: If you use a credit card to pay for a student loan and then pay off the balance during the APR period, you will save so much interest, and it also helps you to make more money

How to Manage Student Loan Payments

There are a bunch of strategies to pay off student loans. If you’re having trouble keeping up with your student loans, you might want to investigate the following options before you pay with a credit card:

  • Repayment plans: Federal student loans have various repayment options. If one repayment plan isn’t working, the Department of Education says you can switch to another one for free anytime.
  • Forbearance: You can apply for forbearance if you’re experiencing financial hardship. This will allow you to suspend or reduce payments temporarily. There are forbearance options for federal student loans. And you can ask your lender about options if you have private student loans. But your loan may continue to accrue interest during that time. And some forbearance agreements could affect your credit. 
  • Federal consolidation: You might be able to combine several federal loans into one. It’s a specific type of federal loan that could simplify and lower your monthly payments. But it might also extend your repayment term, and you may pay more in the long run. And you may no longer be eligible for loan forgiveness programs.
  • Private refinancing: By refinancing your loan with a private lender, you may be able to get a new loan with a lower rate. Refinancing may allow you to combine multiple private and federal loans like federal loan consolidation. But other loan terms may change, and you could also lose benefits.
  • Other options: If you have a private student loan, you can try contacting your lender and explaining your situation. In some cases, they might be able to offer other relief options.

What to Consider if You Use a Credit Card to Pay Student Loans

  • Understand terms and fees. Whether using a third-party service, a balance transfer, a cash advance, a convenience check, or any other method you find, be sure you know how much it might cost to use your credit card.
  • Double-check dates. Along with terms and fees, be sure you know key dates. That might include when your student loan debt will be transferred to your credit card, when promotional rates end, and when your monthly payments are due.
  • Create a budget. Once you have terms and dates straight, you can use that information to plan how to manage your debt. The CFPB has budgeting advice that may help. Budgeting could help you plan your payments to avoid paying interest you could have otherwise avoided.
  • Examine the effects on your credit. CreditWise from Capital One might be able to help. It’s free to everyone—even if you’re not a Capital One customer. And you can use the built-in CreditWise Simulator to explore how certain financial decisions could affect your credit. 
  • Find the right card. Remember, your interest charges can greatly affect how much you owe. If you’re looking for a new card, consider doing some research. Depending on how you manage monthly payments, finding a card with a low introductory rate and a low regular rate could help you save money. And checking if you’re pre-approved before you apply could give you an idea about whether your credit application will be accepted.
  • Use your card responsibly. If you’re using your card for things other than student debt, be sure you understand how interest is calculated. For example, new purchases may not be subject to a promotional rate. Using your card responsibly also means not maxing out your card, only applying for or using the credit you need, and making at least the minimum payment by your due date every month.

Conclusion:

As a student, you should consider the risk of taking a loan with your credit card, as this may affect your overall credit score. It’s best to skip credit cards unless you have the cash to pay your balance in full each month, so strive to avoid this option if you can. If you’re struggling with your student loan payments, also keep in mind that there are alternatives to consider

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