Can you pay student loans with a credit card?
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It’s possible to make your student loan payments with a credit card, but you’ll likely have to use a third-party service to do so. Still, the potential for rewards is there, and there are other benefits to be gleaned when you pay your bills with plastic.
However, there are also drawbacks. When you pay bills with a credit card, you’re subjecting yourself to forking over significantly more interest over time, among other things.
If you don’t have enough money to pay your credit card bill in full after making a student loan payment, it probably isn’t a good idea. Where many student loans (including both federal loans and private student loans) come with interest rates below 5 percent, the average credit card interest rate is well over 19 percent. And with seven in 10 Gen Z and millennial student loan borrowers having delayed a major financial decision due to their debt, according to a 2022 Bankrate survey, it’s imperative to avoid further burdening yourself with credit card debt.
Let’s take a look at the potential risks and benefits of paying student loans with a credit card, as well as a few tips if you decide to do so.
The risks of paying student loans with a credit card
Using credit to cover regular expenses can pay off, but there are risks involved, including:
Losing money to fees
Most credit card issuers don’t let you pay your student loans directly with a credit card. As a result, you’ll have to get creative when it comes to paying with plastic, and you may have to use a third party to facilitate the transaction. Third parties charge fees, which can add to the amount you owe and wipe out any benefit you get from not paying directly.
Racking up considerable debt
If you rely on credit too much, you could wind up racking up credit card debt that won’t go away. Since the average credit card APR is high, you have the potential to start a debt spiral that could be difficult to stop.
Potential damage to your credit score
Your credit utilization ratio makes up 30 percent of your FICO credit score, and running up debt on revolving accounts you have (like credit cards) can cause this rate to go up quickly, meaning your credit score might drop.
Missing out on tax deductions and benefits
Paying your federal student loans directly also comes with benefits you could lose out on if you pay your loans off with a credit card. You can deduct student loan interest up to $2,500 on your federal income tax returns, reducing your overall tax burden. You may not qualify for this deduction if your modified adjusted gross income (MAGI) exceeds certain limits set by the IRS. Speak with an accountant before giving up this potential deduction by transferring your loan to a card, since interest payments on personal credit cards aren’t tax-deductible.
Losing consumer protections for federal student loans
Federal student loans also carry some protection against difficult financial circumstances such as deferment or forbearance. If you can’t pay your loan, you can also change your repayment plan. As an alternative to federal student loans, an income-based repayment plan offers variable payments based on your income, which is great for new graduates who are job hunting or taking advantage of the gig economy while they look for work in their field of study.
Potential benefits of paying with a credit card
The benefits of paying your student loans with a credit card can vary from person to person, but here are the main advantages to consider:
Earn rewards on your spending
When you pay student loans and other bills with a card that earns rewards, you get the chance to rack up points and miles on those purchases. Just remember that any fees you pay will eat away at the rewards you earn.
Buy time before your payment is due
Paying with a credit card can buy you some more time until you need to make a payment, which can be helpful during times when money is tight.
Secure 0 percent APR for a limited time
If you can snag an introductory 0 percent APR, paying eligible student debt with a credit card may help you save money on interest. If you use the card to pay your student loan and then pay off the balance during the intro APR period, you might save some money.
Should you pay your student loans with a credit card?
Although there are plenty of disadvantages, at the end of the day, credit cards can be used to cover student loans and other bills. Whether or not it is a good idea is entirely up to you, but if you don’t already have the cash in hand to make a payment, it may be best to stray away from this method.
If you decide to go this route, there are some added steps you’ll have to take. Here are a few suggestions worth considering while establishing a pay-off plan:
Review your credit
First, get copies of your Equifax, Experian and TransUnion credit reports at AnnualCreditReport.com and fix any mistakes to improve your odds of credit approval. Then, check your credit score to see where you stand and review the cards offered in your credit range.
Consider a rewards or 0% APR card
If you currently have a student credit card that you’ve been using to build credit, you may be able to qualify for a rewards card that will enhance your rewards value. While student credit cards are excellent for building credit, earning student-centric rewards and other perks, they can be limiting due to low credit limits and high interest rates.
Take a look at credit cards with 0 percent introductory APR offers to reduce your interest payments when you pay your student loans with your new credit card. You’ll typically need a good-to-excellent credit score to qualify, but if you do, many cards in this niche also let you rack up points or cash back.
Plan your loan payments
Once you’ve been approved for your new card, initiate your student loan payment several days before the due date. Payments by convenience check or Plastiq might take longer than a direct payment. Follow up to ensure the payment process went off without a hitch.
If you’re paying with a 0 percent APR card, create a budget to pay your loan off before the promotional period ends. After that, the regular APR kicks in and any remaining balance will start accruing interest.
If you’ve chosen a rewards credit card that offers cash back, you may want to take your earnings and apply them to your statement balance to pay off your debt faster.
The bottom line
While technically you can pay your student loans with a credit card, that doesn’t mean you should. It’s usually best to skip credit cards unless you have the cash to pay your balance in full each month, so strive to avoid this option if you can. If you’re struggling with your student loan payments, also keep in mind that there are alternatives to consider. You could switch your repayment plan or even refinance your student loans to secure a lower interest rate, a lower monthly payment or both.
Learn more: How to pay off student loans with a credit card.