The Pros and Cons of Paying Student Loans With Credit Card for Points | 3 Alternatives

A term that usually tags along with credit cards is ‘points.’ These credit card points are incentives that you earn through cash back, rewards, or loyalty programs. These points are accumulated when you make purchases using your credit card in specific categories. They are updated at every billing cycle; one can redeem them at partnered hotels, lounges, and much more. 

Now the question arises whether these credit card points are earned even on repayment of loans or not. The US Treasury Department does not allow students to repay loans using credit cards.

Paying Student Loans With Credit Card for Points is not a good idea. It has multiple risks involved. You will not get a chance to negotiate with your bank which provides student loans.

However, some people still find ways to pay their student debts through credit cards. Usually, what happens is that if your student loan servicer allows you to repay your student loan using a credit card, you can earn points and significant cash back. 

Paying Student Loans With Credit Card for Points

It doesn’t make financial sense for most student loan borrowers to pay off student loans using a credit card. Credit cards can be used to pay student loans. However, this will remove student loan protections. It could also lead to your debt being transferred to a credit product that has a higher interest rate. You will also likely be charged fees for doing so.

Processing Fees

A transaction fee will apply if you are using a service for payment with a card, because the student loan company does not accept credit cards. A fee and interest are also charged for credit card convenience checks. Transferring balances usually incurs a fee.

Loan Forgiveness

Particularly if you have federal student loan, student loans offer consolidation, deferment or forbearance and loan forgiveness options. These protections are no longer available for student loan balances that have been transferred onto a creditcard. Adam Minsky, student loan attorney says, “If you have federal student loans, you will lose options for death discharge or disability discharge and the rights to cure default.”

Interest Rates On Student Loans

The interest rates on student loans are typically lower than those on credit cards. The interest rate on federal student loans for undergraduates disbursed after the July 1st 2020 deadline is typically 2.75% (which is 0% up to Dec. 31, 2020 due to COVID-19 relief).

Compare this to the average credit card rate of 15% to 23% and you will see that student loan debt can be transferred to credit cards to save money.

Thus Paying Student Loans With Credit Card for Points is not very good idea. It has more negatives than positives.

Can You Pay Your Student Loan With A Credit Card ?

As of today, students cannot repay student loans with a credit card directly to their student loan servicer or lender. However, it is possible to pay your student loan using a third-party payment service or a line of credit. These options are very expensive and risky as they come with high-interest rates. 

A wise alternative to these is contacting your agency so that the payments can be reduced or paused for a while. You can also choose to pay your loans in total if you have sufficient funds. You will earn credits in return.

Is It Smart to Use A Credit Card to Pay Student Loans ?

Several student loan borrowers think it is baseless to repay student loans with a credit card. Because when you opt to repay your student loans using your credit card, you compromise a lot. 

You give up on one of the essential factors guarding you: student loan protection. Also, you begin incurring higher rates of interest as against your initial student loan interest. 

Here are some more factors that will add to your woes:

1. Fees

Sometimes, students engage with a third-party service provider to pay with a credit card because the loan provider no more accepts direct credit card payments. So, the third-party service provider charges a fee for this process, called the transaction fee. Also, credit card convenience checks have interest rates and fees, and so do balance transfers. 

2. Interest rates

The rates of interest that students incur on taking a student loan are much lesser when compared to the rates of interest incurred when paying through a credit card. For instance, student loans for undergraduate borrowers come at a 2.75% interest rate, whereas the average credit card rate of interest comes in the bracket of 15% to 23%. 

3. Protections

If you have federal student loans, you get some relaxation in consolidation, forbearance, loan forgiveness, and deferment. These are called protections. However, if you move to repay your student loan using your credit card, these protections will not apply to you anymore. 

Why Can’t I Use A Credit Card to Pay Student Loans ?

The companies that collect your student loan repayments generally prefer payments in cash or bank transfer and do not allow for using a credit card. The reason behind this is that the Federal Regulations prohibit the usage of credit cards for loan repayments. 

Another reason is that every credit card transaction involves some processing fee generally paid by the party that accepts the credit card payment. Hence, those who lend you money will certainly not pay anything like that. 

However, you can pay off your private student loans using some alternatives, which means you will not be repaying your student loan directly to the loan lender but will be exercising an alternate route. 

The following routes are available for you. However, they have their set of drawbacks.

1. Use a third-party provider.

You can opt for a third-party provider and make your monthly payments by credit card. You will have to incur a transaction fee on each transaction that you make. It will ultimately strain the cost of the loan. 

2. Pay off the student loan balance.

Some exceptional private lenders allow student loans to be paid off with a credit card. Some borrowers agree to this because they get rewards. Here, you will require a credit limit to acquire your student loan balance. 

3. Opt for cash advance

You can choose to avail a cash advance facility to pay off your student loans. If your credit card issuer permits, you will be eligible for a cash advance on your credit line. However, you must know that cash advances come with significantly high rates of interest that can exceed 25%. Please consider this option as your last resort.

Can You Pay Private Student Loans With a Credit Card?

It is possible to pay private student loans with a credit card, but most student loan providers do not accept this form of payment. Instead, you can use a third-party payment service, line of credit, or cash advance to make your payments. However, these methods are expensive and risky. You will typically pay extra fees for using the service, and you will have to pay interest on the amount you borrowed.

While federal loans offer several repayment options, private student loan issuers often offer repayment plans that include reduced payments. While this option is a risk, it can offer greater repayment flexibility. Depending on your loan type and lender, you may be able to negotiate lower payments or lower interest rates.

Refinancing your private student loans is another viable option. Refinancing can save you a lot of money in interest. This option is more costly than transferring federal loans, but you may end up with a lower interest rate than with a credit card. Refinancing can also extend your loan’s term and reduce your monthly payments. This can also help you to pay off your student debt sooner than if you don’t refinance.

You can also opt to pay for student loans using a credit card through a third-party provider. Some of these third-party payment services, like Plastiq, accept Visa, MasterCard, or American Express. While these services are convenient, they have a cost. These services charge a small fee for using them, which can add up to several hundred dollars.

Can You Pay Federal Student Loans With A Credit Card ?

The straightforward answer is no. You cannot possibly pay off your federal student loans using a credit card. However, you can use a credit card to repay private student loans. 

Some Alternative Ways to Get Help With Your Student Loan Payment

If you have scrolled this far, it is safe to assume that you know the drawbacks of repaying your student loan with a credit card. Hence, we have you covered. Here are some alternatives to help you with your credit card repayments.

1. An income-driven repayment

Students who opt for a federal student loan can rely on this method. Income-driven loan repayment plan helps limit student loan bills to 10% – 20% of the student’s discretionary income. It refers to the amount you have left after buying necessities and taxes. 

Also, you will be forgiven of balances that remain after 20-25 years. This scenario does not apply to private loans. However, there is no harm in asking your lender for the same. You can find out about opportunities that enable you to pay a reduced interest rate for some time. 

2. The option of forbearance or deferment

Private and federal student loans have a facility of being paused temporarily. It comes as a breather for several students struggling to repay their loans. When to utilize this facility depends on the student. The wise decision would be to utilize it when you are stuck in a financial hardship that will last for a short period. For example, if you are switching jobs, you can utilize this facility and get a break from your usual student loan repayment schedule. 

3. Refinancing

If you have managed to have a good credit score, you can qualify for refinancing your student loans at a much lower interest rate. Your monthly repayment schedule may not reduce unless you voluntarily extend your repayment term. 

Is it Illegal to Use Student Loans to Pay Off Credit Cards?

If you’re a student and you’re using your student loans to pay off credit cards, you’re technically violating the terms of your loan agreement. Although it’s not illegal, you could end up in trouble with your lender if you violate the terms of your loan agreement.

Although student loans are a legitimate source of funds, misuse of them can lead to their revocation by the Department of Education and have long-term financial repercussions. While you may not have to face legal action for using student loan money to pay off credit cards, you can report the misuse to the Department of Education fraud hotline, run by its Office of Inspector General. If the Department of Education finds out about the misuse of a student loan, it has the right to confiscate the money and leave you with a massive bill.

While you may be considering using your student loans to pay off credit cards, you should remember that the interest rates on credit cards are typically higher than those of student loans. If you use your student loans to pay off your credit card debt, you should try to pay off your credit card balances first, because this will make your payments easier over time.

Although you can use student loans to pay off credit cards, you should only borrow as much as you need to cover your tuition and fees. Borrowing more than you can afford will only add more debt and take longer to pay off.

Final Words !

It is best to avoid paying your student loans using your credit card. You not only lose out on student protection facilities, but you also end up incurring high-interest rates that subsequently add to your loan amount. Hope you have got a fair idea about the advantage and disadvantages of Paying Student Loans With Credit Card for Points.