Should I Pay Off My Student Loans With a Credit Card?

students

by on January 11, 2014

For many young Americans, student loan debt seems as though it will be a permanent line on their budgets. According to Forbes, 71% of American students earning bachelor’s degrees in 2012 took out loans to get them, totaling an average of $29,400 by graduation. If you’re facing a mountain of debt and poor job prospects, like many millennials, you might be having a hard time meeting your bills. Or maybe you have a smaller amount of debt, and wish there was a way to take care of the whole thing now. Enter your new credit card with 0% interest for a year. Is this the solution? No. Here’s why:

It’s not always possible

Many private lenders don’t allow you to pay back student loans with a credit card. Some only allow it in certain cases. Either way, check with your lender first. The federal government only allows you to pay with a credit card if you’re in default – that is, you haven’t made a payment on your loan in nine months.

It can be costly

Even if your lender allows you to pay your loan with a card, there can be multiple fees involved. For example:

  • Processing fees. Many lenders who do accept credit card payments will charge you a fee for the privilege. These will vary by lender.
  • Higher interest. Even if you get a 0% interest credit card, you might not be able to pay off your loan during the introductory period. The average ongoing APR for credit cards is around 15%, so if you don’t pay it off in time, your rate will be much higher than on your student loans now.

If you’d like to pay your loan with the credit card, consider the worst case scenario in terms of fees. If you can afford these, and think it’s still worth the risk, keep reading. 

There’s less leeway

Part of your reasoning may be that student loan debt isn’t dischargeable in bankruptcy, and credit card debt is. However, if your debt is federal, there are many programs in place to help you with it, including:

  • Income-based repayment. If you qualify for an IBR plan, your student loan payments will be recalculated based on your income and family size. They’ll be capped at 15% of your discretionary income, and after 25 years of payments, any unpaid balances will be forgiven. The government might even help you out with your interest payments.
  • Loan forgiveness. Certain federal loans are also eligible for loan forgiveness, provided the borrower works full-time at a qualifying public service job and makes ten years’ worth of on-time payments. After that, the balance of the loan can be forgiven.
  • Deferment or forbearance. If you’re enrolled in school, the military, or the Peace Corps, or are experiencing severe economic or physical hardships, it’s possible to put off your loan payments for a specified period. While there are some credit card protections for people in the military, it’s very much case-by-case.

Needless to say, your credit card company will offer you far less generous terms if you’re late with a check, and they’ll be much quicker to report you to credit bureaus if you miss a payment or two. 

Your debt is more easily discharged – maybe

You probably know that while credit card debt is dischargeable in bankruptcy, student loans aren’t. This can be a good reason to consider credit…but you shouldn’t run up your balance on credit cards with the intent to discharge it in court. If you put your student loan on your card and later, decide to declare bankruptcy, your card issuer can object. And if they can prove that you put you ran up credit card debt with the intent to declare bankruptcy, you can be charged with fraud.

The bottom line

It’s true. There are people who have successfully paid off their student debt – and at a much lower interest rate – by using a credit card. If you have very little debt and you’re extraordinarily disciplined about your finances, it’s not impossible. However, the majority of recent graduates face too much debt and too little income to make this a viable strategy. Take a long look at the other options available to you – like IBRs or other repayment plans – before resorting to a credit card.

Student image via Shutterstock

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