October 23, 2020

Paying a student loan with a credit card? Here’s what to consider – Fox Business

Paying a student loan with a credit card? Here's what to consider - Fox Business

Paying a student loan with a credit card? Here's what to consider - Fox Business

While it’s technically possible, it’s rarely a good idea to use a card to pay off a student loan. (iStock)

In 2020, the coronavirus pandemic upended the lives of tens of millions of Americans. According to the U.S. Department of Labor, roughly 25.3 million workers claimed unemployment benefits during the week ending Sept. 26. That’s a significant increase from the same time last year when 1.4 million people were on unemployment benefits.

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Amid the current economic uncertainty, consumers may be exploring options they previously didn’t consider to keep up with their debt payments — like paying their student loans with a credit card. If you’re considering this option, make sure you browse available credit cards on the online marketplace Credible now to find the best option for you.

Here’s everything you should know about the process.

Can you pay a student loan with a credit card?

You may be tempted to use a credit card to pay your student loans because it could help you stay out of default.

But the process of using a credit card to pay student loans is complicated. U.S. Department of Treasury regulations do not allow federal student loan servicers to accept credit card payments, and it’s typically not an option with private lenders.

One way to get around that is to use a balance transfer check, which some credit card companies send out to cardholders from time to time. These checks often come with a 0% intro APR promotion and a small balance transfer fee. Simply write out the check to your lender and submit it as payment.

Consider using an online marketplace like Credible to compare some of the top balance transfer cards side by side and pick the right one for you.

STUDENT DEBT IS AT AN ALL-TIME HIGH: WHAT THAT MEANS FOR YOU

Why paying a student loan with a credit card is a bad idea

Even with the possibility of getting a 0% APR promotion on a balance transfer check, it’s not recommended that borrowers use a card to pay their student loans for several reasons:

  • Balance transfer fees will reduce your potential savings.
  • Once the promotional period is over, you’ll end up paying a much higher interest rate.
  • Credit cards don’t have a set repayment term, so there’s a high risk that you’ll end up paying off the debt (again, at a much higher rate) for longer.

HOW TO APPLY FOR FEDERAL AND PRIVATE STUDENT LOANS

Other options to pursue

If you’re struggling to make your student loan payments, there are a few alternatives to using a credit card that will put you in a better position in the long run:

  • Forbearance: Many student loan servicers and lenders have offered special forbearance options for borrowers during the pandemic. Contact your lender to get information.
  • Income-driven repayment plans: If you have federal student loans, you may have access to one or more of the government’s income-driven repayment plans. These plans allow you to reduce your monthly payment based on your income level.
  • Use a credit card for other purchases: While using a card may not be a good idea to pay off your student loans, you can use one to cover other expenses, freeing up cash for your student loan payments. Visit Credible to learn more about and to compare credit card options.

In some cases, it may also be worth considering refinancing your student loans. With low interest rates, it’s possible to score a rate that’s lower than what you’re paying right now, which could reduce your monthly payment. Refinancing with a longer repayment term can also lower your payment to a more affordable level.

If you can qualify for a student loan refinance at a lower rate than you’re currently paying, there are often no downsides to refinancing. You can use Credible to compare student loan refinancing rates from multiple private lenders at once without affecting your credit score.

Use an online student loan refinancing calculator to get a sense of what your new monthly payment could be.

HOW MUCH DOES IT COST TO REFINANCE A STUDENT LOAN

The bottom line

Paying off student loans can be challenging during normal economic times, but it can be even more difficult when you’re struggling financially. If you have federal student loans, take advantage of the benefits the U.S. Department of Education provides for situations like these, including forbearance, deferment, and income-driven repayment options.

In fact, if you have federal loans, it may make more sense to pursue these options than to use student loan refinancing.

If you have private student loans, however, refinancing them could allow you to save money on interest and also allow you to move to a lender with more generous forbearance options.

Finally, don’t forget to consider using a credit card to cover other expenses while you get back on your feet. There are several cards that offer 0% intro APR promotions, which can give you some time to pay off the balance interest-free.

WHY YOU SHOULD REFINANCE STUDENT LOANS NOW, ACCORDING TO AN EXPERT