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You can use rewards points to pay off your student loan

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You would have to spend as much as $3.7 million to earn enough debit or credit card rewards to pay off the typical student loan debt. That's not happening, but you can fairly painlessly nibble away a bit of what you owe using plastic.

Several credit cards allow the option of transferring rewards dollars to pay down student loan principal, and what is being billed as the first debit card dedicated to reducing loan debt is expected to debut this fall.

Gradifi, a Boston-based startup that helps people pay down student loans, announced in June it had partnered with a small bank to offer the card, backed by a checking account insured by the Federal Deposit Insurance Corp. Cardholders will earn 1% rewards with the Gradifi MasterCard debit card on all signature-based purchases. PIN-based transactions earn nothing.

A cardholder's rewards will automatically be applied to pay down a student loan at one of the dozens of lenders Gradifi works with.

"We're really trying to do something that's painless, that fits into normal behavior," says Tim DeMello, Gradifi's founder and CEO.

There is no limit on the amount of cash back cardholders can earn, DeMello says, and the online checking account offered by Radius Bank has no monthly fees and promises unlimited free ATM withdrawals. The account's $25 overdraft fee falls below the industry average, as well.

"The idea is that we don't want to gouge clients for fees," says Mike Butler, CEO of Radius Bank, also based in Boston. Butler says he hopes to sign as many as 25,000 new checking account customers a year through the Gradifi partnership.

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Ballooning loan debt

The emergence of a rewards program to offset some student loan debt arrives as this year's graduates leave school owing $37,172 on average, up about $2,000 from 2015. (This average excludes the 30% of graduates who have no student loan debt.) About 43 million people owe a collective $1.23 trillion in student loan debt, according to the Federal Reserve Bank of New York.

The student loan delinquency rate, meanwhile, stands at 11.6%.

"There is a millennial focus on paying down debt, and that includes student loans," says Rick Castellano, a spokesman for Sallie Mae, the big student lender. "And there's a response in the market to that trend."

Credit card options

Sallie Mae offers its own rewards program and branded credit card to help chip away at that debt.

The Upromise MasterCard offers up to 10% cash back on purchases made with online partners through the company's website, 10% cash back at participating restaurants, a 2% cash-back reward on department store and movie theater purchases and 1% on everything else.

The card and Upromise program are primarily used by families to save for college, but members do use rewards to pay down student debt, as well, says Abigail Brooks, Sallie Mae's manager of corporate communications.

Rewards of at least $10 can be transferred automatically each month to pay down the principal on Sallie Mae or Navient loans. The MasterCard rewards program has helped borrowers repay $40 million in student loans since its inception in 2001, Castellano says.

If the loan isn't through the 2 companies served by Upromise, borrowers can look to the suite of cards offered by Citibank.

ThankYou Rewards from eligible Citibank credit cards can be used to pay student loan debt. The rewards must be redeemed by phone, however. Citibank will cut a check in denominations of $25-$1,000 made out to the lender, but the borrower is responsible for submitting payment.

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What you can save

You're not going to pay down all or even much of your student loan using reward dollars, but DeMello's company works to shave months, if not years, off of repayment through its combination of programs.

A paydown rewards calculator on the Gradifi website estimates how rewards could affect the loan's repayment period. If a borrower used the Gradifi debit card to make $1,000 in purchases every month, he or she could cut 3 months off the standard 10-year repayment period on a $37,000 loan carrying a 5% interest rate.

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Credit vs. debit

What you save might depend on the type of rewards program in which you're enrolled. If you can't ensure you'll pay off your balance each month on a credit card, a debit card with rewards may be a better option, says Dennis Johnson, a certified credit counselor for ClearPoint Credit Counseling Solutions in St. Louis. Otherwise, you may find yourself falling further into debt -- and losing any of the benefits a rewards program offers.

Either way, Johnson says using any type of rewards program to help pay down student loans might not be that beneficial.

"To me the dollar amount would be, I would not say insignificant, but it would be so low that I don't know if it should be a budget consideration for a person," he says.

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Editorial Disclaimer: The editorial content is not provided or commissioned by the credit card issuers. Opinions expressed here are author’s alone, not those of the credit card issuers, and have not been reviewed, approved or otherwise endorsed by the credit card issuers.

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