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Pay student debt with rewards?

By Janna Herron ·
Thursday, April 19, 2012
Posted: 4 pm ET

College graduation is less than a month away for many seniors, and one burden (besides finals) looms over them: paying off student loans.

Sallie Mae offers an attractive, but possibly dangerous, way to do that through its Cash Back Visa Card. The rewards credit card allows cardholders to earn 5 percent cash back on gas, groceries and books, up to $500 a month for gas and groceries combined and $1,000 on books. Cardholders also earn 1 percent back on all other purchases.

There's also a bonus: You can get a $100 extra cash reward after making $500 in purchases in the first 90 days.

The hook is that the cash-back rewards you earn can be applied directly to your student loan debt, starting at $25 in rewards. Otherwise, cardholders can redeem their rewards for cash.

The card is designed for recently graduated students or the parents of current students, a company spokeswoman told That's a no-brainer since the Credit CARD Act of 2009 requires anyone under the age of 21 to give proof of income or have a co-signer before getting a credit card.

The real question is whether a rewards credit card is a good strategy to paying back student loans. The risk is that you may trick yourself into spending more to get rewards.

For example, you're at an electronics store and you think to yourself: "A new HDTV is not in my budget right now. But if I buy it, I can use the rewards to pay back my college loans."

Here's the problem with that reasoning: If you buy the $700 HDTV and can't pay off the entire balance, then you will be charged somewhere between 11.99 percent and 15.99 percent on the balance. That more than offsets the 1 percent (or 5 percent if you have a big grocery bill) you get back from the purchase.

Not only are you paying for your rewards, you're funding a dozen other people's rewards program, too.

The bottom line is that you don't need a rewards credit card to pay off your student loan. Dedicate a portion of your income every month to pay your college debt.

As for a credit card, choose one that fits your financial lifestyle. If you think you won't always pay off your monthly balance (a strategy I don't recommend), then find one with a low interest rate. If you find one that has an annual fee, consider what you get in return.

And if you want a cash-back rewards card, look for one that takes advantage of purchases you already make, so you don't spend unnecessarily to get the rewards. Check out Bankrate's survey of cash-back cards this year to compare.

What do you think about Sallie Mae's credit card?

Follow me on Twitter: @JannaHerron.

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