Paying Student Loans with a Credit Card: Is It Risky?

Are you considering paying off your student loan with a credit card instead of a traditional payment method? You may have heard that it is a way to enhance your credit score, get incentives, and pay down your debt quicker; nevertheless, the question is whether or not the potential benefits are truly worth the risk. 

Paying student loans with a credit card isn’t as simple as swiping your card, and it is possible that doing so will cost you more money than you had anticipated. Let’s further discuss the details. 

Is It Possible to Pay Student Loans with a Credit Card?

It is not possible to use your credit card to make direct payments toward your student loans. You will not be able to make a payment on your loan using a credit card unless the company that services your loan has established a process to directly accept payments made using credit cards. 

Some loan servicers have established private payment facilities, and if you want to pay with a credit card, you will be required to pay an additional cost to use those services. There is typically a price of between 2% and 3% associated with using private payment systems, and the majority of the time, these fees are not justified.

Should You Pay Your Student Loan with a Credit Card?

In most cases, using a credit card to pay off a student debt is not a wise financial decision. Because of the exceptionally low-interest rates that are associated with student loans, it is quite unlikely that any rewards or points earned would be sufficient to compensate for the additional expenses that will be incurred as a result of using a credit card to make payments. 

If the interest rate on your student loan is already quite low, then using your credit card to pay off your loan won’t be beneficial to you in any way. If you are unable to pay off the balance on your credit card every month, you run the risk of getting into credit card debt, which can be very difficult to get out of once it starts.

What are the Risks of Using Credit Cards for Student Loan Payments?

When you pay off your student loan using a credit card, you are simply switching one type of debt for another. There is a possibility that you will be required to pay transfer fees in order to make the transition, and it is nearly certain that the card will have interest rates that are greater than the loan. 

If you do choose to pay off your loan with a credit card, you must ensure that you are able to do so on a monthly basis; otherwise, you will find yourself in a worse financial situation than you were in when you started.

When Does Paying Off Student Loans with a Credit Card Make Sense?

In some cases, it could make sense to use a credit card to pay off student loans:

• It is possible to avoid paying interest on student loans by using a credit card with a 0% introductory APR term and paying off the debt before the promotional period ends. If you don’t want to risk hurting your credit score, make payments on schedule.

• Paying off your student loans using a credit card that gives you rewards for purchases, like cash back or points, could be a good way to rack up those incentives. If there are fees involved with using the card, you should assess them against the potential incentives.

• Paying off your student loans with a credit card could be a good option if you’re having trouble making your payments and are at risk of default. If you’re having trouble making your payments, continuing to use credit cards is not a long-term answer; instead, try fixing the underlying problem.

You should weigh the perks and downsides of using a credit card to pay off student loans before making a final decision. The financial benefits of keeping up with your student loan payments as originally planned may outweigh the costs in many situations.

Other Ways to Pay Off Your Student Loan

Even if you are unable to make a direct payment using a credit card, it is still possible to pay off student loans in an easy and convenient manner. Here are several examples:

• Income-Driven Repayment (IDR) Plans. For those with federal student loans who are worried about paying them back, this is the best choice. However, these are not typically available with private loans. But, you have the option to speak with your lender about the possibility of obtaining a lower interest rate or paying simply the interest for a set amount of time.

• Student Loan Deferment or Forbearance. A number of companies that supply private student loans have their very own deferment programs that they make available to borrowers who meet the requirements. If you have been laid off from your job or if you have had an unexpected medical emergency, you may be eligible to defer payment on your personal debts for a few months.

• Student Loan Refinance. The interest rate on your student loans may be lowered through refinancing if you have strong or excellent credit. Although extending your repayment term can reduce your monthly payment, doing so can reduce the amount of interest you save.
  
  However, keep in mind that refinancing converts federal loans into private loans, which means you no longer have access to federal loan benefits like income-based repayment plans and extended grace periods.

• Debt Consolidation. Consolidating federal student loans is analogous to refinancing in that it involves replacing numerous loans with one new loan. However, this will not result in a cheaper interest rate for you. 
  
  Instead, it may result in a longer payback term, which will provide you with a lower payment each month. Furthermore, you will be able to keep access to the benefits of your federal loan.

Bottom Line

It is not always a good idea to pay back student loans with a credit card because the associated fees and interest charges can quickly add up to a significant amount.

A better option if you want to use your credit cards right away? You can make payments on your student loans using the points or cash back you receive from making purchases with your credit card.

Using certain credit cards, you will be able to do this right away. You can choose to have your rewards delivered to you in the form of a check or a transfer to your bank account rather than having them credited to your account as a statement credit. This will allow you to put the money toward paying off your student debts.

Before using credit to make loan payments, it is important to have a clear understanding of the associated costs. This will allow you to manage your budget without putting your credit score or cash flow in jeopardy.