Student loan debt is now one of the largest forms of consumer debt in the country. According to a report from Forbes, 44.2 million people have student loan debt totaling roughly $1.52 trillion in the United States. The average student graduated in 2016 with $37,172 in student loan debt. If you have to repay tens of thousands of dollars in the years to come, wouldn’t it be nice to earn credit card rewards along the way? Getting 1% back would help put some money back in your pocket.
Some of the rules surrounding student loan payments have changed as of 2017, according to WalletHub. The U.S. Treasury Department no longer allows student loan payments to be made by credit card. Despite this, some people still try to find ways to transfer their student loan balances to a (cash rewards) credit card.
But there are a few things you'll need to consider before making that transfer from your student loan lender to your credit card company. Let’s take a look at whether you can earn credit card rewards from paying your student loans, how to do it and whether it is a good idea.
Getting the Right Card
If you deal with a student loan servicer that accepts credit card payments for no fee or a low fee (or is willing to waive the fee), you might be able to earn significant cash back by using your credit card to make your loan payment. It also depends on whether you are the type of person who always pays your credit card bill in full each month.
First, you’ll need to apply and be approved for a credit card with a large sign-up bonus plus ongoing cash rewards. Look for something like $500 cash back after you spend $5,000 (or more) within your first three months of card membership, plus 1% back on all purchases. These cards are usually reserved for people with very good to excellent credit (see Find the Top Cash Back Credit Cards).
Secondly, remember: Not all credit cards are created equally — meaning, not all cards allow you to transfer your loan balance. So, you'll want to make sure you have the right card. According to WalletHub, the following companies offer students the option to transfer their student loan balance over to their credit cards: Bank of America, Barclay's, Capital One, CIT, Discover, Pentagon Federal Credit Union (PenFed), USAA, U.S. Bank, Wells Fargo and SunTrust Bank.
This is the card you’ll use to make a large, one-time extra payment on your student loan. Set aside the cash to pay off your pending credit card charge, so you don’t end up trading low-interest debt for high-interest debt. Then, before making the payment, make sure your credit card issuer won’t characterize the transaction as a cash advance — and get that confirmation in writing. Also, let your credit card issuer know ahead of time that you're going to be making a large transaction so it won’t be declined or flagged as fraudulent.
After making the payment, keep an eye on your credit card account to make sure the transaction posts as a purchase, not a cash advance. If all goes well, you’ll meet the requirements to earn the sign-up bonus, plus earn 1% back. You’ll then want to pay your credit card bill in full and on time to avoid incurring interest or late fees.
With this strategy, you’ll accomplish three financial goals at once: taking a chunk out of your student loan principal balance, saving all the interest you would have paid on that principal over the years and earning significant credit card rewards.
And if you’re lucky enough to have a student loan servicer that accepts credit card payments for any amount with no fee, there’s no reason not to pay your student loan bill with your credit card every month, as long as you’re not carrying a credit card balance.
Read the Fine Print
Make sure you know your limitations as well as the terms and conditions of your card before you make the transfer. First, you'll want to make sure you can transfer only as much as you can pay back. Don't get overindulgent just to get the points or the rewards if you can't at least meet the minimum payment requirements of your credit card.
Secondly, if you're doing a balance transfer, know that these transactions may come with a higher interest rate. So if you can't make the full payment at the end of the statement month, you may be paying a higher interest rate than a regular purchase transaction. If it's a new card, you may be able to benefit from low- or no-fee balance transfers for the first six to 12 months.
How to Make Your Payment
Can't do a balance transfer? Contact your credit card company for a convenience check. You'll write this the same way you write a check from your bank account, except it's drawn on your credit card. But keep in mind, convenience checks can also come with a high interest rate, so you'll want to know what rate and fees apply.
You can also try making payments through third-party processors like PayPal, Stripe, Plastiq or Square. These systems will charge your credit card directly and then send a check or a wire payment to your student loan company. But beware: You may be charged a fee for using their services. Some of them charge a percentage of the payment balance, so you'll want to be sure how much more you'll be paying. Some of these companies may offer incentives and promotions or lower fees.
Know What You're Getting Into
If you’re someone who typically carries a credit card balance, it doesn’t make sense to make your student loan payments with your credit card. Student loan interest rates are generally lower than credit card interest rates, so if you’re having trouble making your student loan payments on time, it may be cheaper to incur a late payment fee to the student loan company instead of accruing interest on a credit card.
You'll also lose any protections that cover student loan debt. Unlike credit cards, there are certain rights you have as a student loan borrower. Consider some of the options you have as a student loan borrower such as income-based repayment plans, payment deferments or even forbearance, which allows you to stop making payments while interest still accrues on the loan. These options are not available to credit card holders.
If you’re having trouble making your student loan payments, your best option is to look into refinancing or changing the repayment plan on your student loans. (For more, see Time to Consolidate Your Student Loans?)
Will It Hurt Your Credit Score?
Paying off a large chunk of your student loan with a new credit card can actually help your credit score in several ways. Applying for a new credit card will temporarily ding your credit score. However, the increase in your total available credit from the new card’s credit line can help boost your score. Paying down the balance on your student loan can also bump up your credit score.
Charging a large payment that uses up more than 20% of your new card’s available credit can hurt your credit score, but if you pay off the charge before your statement is issued, that large balance won’t be reported to the credit bureau and won’t hurt your score. Your on-time bill payment will help your score.
These are general guidelines about how the credit bureaus say different actions affect borrowers’ credit scores. FICO cautions that different actions will affect different consumers’ scores in different ways, depending on the total picture of their credit profile. (For related reading, see 3 Easy Ways to Improve Your Credit Score and The 5 Biggest Factors That Affect Your Credit.)
The Bottom Line
Many student loan servicers won’t let you pay your student loan with a credit card — or will charge a fee for doing so, or limit how much you can charge. These rules are in place to save lenders money on credit card processing fees and to keep consumers from turning relatively low-interest student loan debt into higher-interest credit card debt.
But if you have excellent credit-card habits, a chunk of extra cash to pay down your student loan, a great rewards credit card and a student-loan lender that will accept credit card payments without tacking on a fee, you can come out ahead by making student loan payments with your credit card.