Don’t Pay Your Student Loans With a Credit Card — Unless You Fall Into these Uncommon Categories

As the COVID-19 student loan payment pause comes to an end, many borrowers are considering alternative payment options. Some may even be considering paying their student loans with a credit card. Although there are a few exceptions where paying your student loans with a credit card can make financial sense, the process is complicated and the risks are significant. Here’s what you need to know about how to use your credit card to pay your student loans — and when you shouldn’t do it.

Can You Pay Student Loans with a Credit Card?

The US Treasury prohibits making federal student loan payments directly with a credit card, and most private student loan lenders don’t accept credit card payments, either. Generally, you’ll need to pay your student loans with an ACH transfer by linking your bank account, a check directly from your bank, or a money order.

However, there are a couple of ways to get around this rule using third-party services, cash advance-like transactions, or balance transfers. Depending on your reason for wanting to pay your student loans with a credit card, and how you plan to pay off the balance, some of these methods may work better for you than others.

Reasons to Pay Student Loans with a Credit Card

Before you consider paying your student loans with a credit card, you should understand the credit card has two separate purposes in this context: as a transaction method and as a financing method.

If you already have the money on hand to cover your student loan payment but want to route the transaction through your credit card — typically to earn rewards — instead of paying directly from your bank account, you’re treating the credit card as purely a transaction method. In this case, it might make sense to pay off your student loans with a credit card. But you should pay off your credit card balance immediately to avoid accumulating more interest.

On the other hand, if you don’t have the money on hand to cover the portion of your loan payment you charge to your credit card, you’re financing your payment. Whether you’re doing this because you can’t afford an upcoming payment or you want to transfer your entire loan balance to your credit card to take advantage of a 0% introductory APR offer, you’re taking on credit card debt to pay off your loan. Although this can help you pay down your debt interest-free for a period of time, it’s a risky move that we’ll dive into in more detail below.

Depending on whether you’re using your credit card as a transaction method or for financing, there are two situations where it can make sense to pay your student loan with a credit card:

To Earn Credit Card Rewards

If you have the money on hand to make your loan payment but simply want to route the transaction through your credit card to earn rewards, it’s theoretically possible — but usually doesn’t work out to be profitable. Since student loan providers typically don’t allow direct credit card payments, you’ll have to go through a third-party provider, such as Plastiq, to process the payment. These providers charge fees, with Plastiq charging a transaction fee of 2.9%. You’re unlikely to find a credit card that offers more than 1%-2% cash back on your student loan payment, which puts your net rewards in the negative after you factor in the transaction fee.

But you might be able to justify using a credit card if you’re earning a large welcome bonus. For example, the Chase Sapphire Preferred® Card currently offers a welcome bonus of 80,000 points (worth $800 if redeemed for cash back and potentially much more if redeemed for travel) after spending $4,000 in the first three months. If you have an extra $4,000 on hand, want to earn this bonus, and owe $4,000 or more in student loans, you could use your card to meet this spending threshold. After you factor in the 2.9% processing fee from Plastiq, the card’s $95 annual fee, and the $40 worth of points you’ll earn from the card’s regular rewards rate ($4,000 at 1 point per dollar), you’re essentially left with $629 in profit if you redeem your rewards for cash back — as long as you pay off the balance immediately before it accrues interest. Otherwise, the high-interest rate you pay on your credit card will quickly wipe away your profits.

To Take Advantage of a 0% APR Balance Transfer Offer

If you have a high student loan balance and are struggling with the high-interest rates, a credit card with a 0% introductory APR on balance transfers could be appealing. Many credit cards offer these promotions for new customers, allowing you to transfer your entire student loan balance to the new credit card and avoid paying interest on the balance for a period of time, usually ranging from 12 to 18 months. But keep in mind that you’ll typically have to pay a balance transfer fee (usually around 3% to 5% of the transferred amount) and that the interest rate on the card will skyrocket after the introductory period ends. You’ll also need good to excellent credit to qualify for most 0% introductory APR offers.

Related Facts

• According to The Institute for College Access & Success, the average student loan debt for the class of 2019 was $28,950.
• According to the Federal Reserve, as of June 2021, U.S. student loan debt was at an all-time high of $1.73 trillion.
• As of October 2021, the Supreme Court has not yet made a decision about President Joe Biden’s student loan forgiveness plan.
• According to a recent survey by Student Loan Hero, more than 58% of federal student loan borrowers rely on the student loan payment pause to maintain their financial stability.

Key Takeaway

Paying your student loans with a credit card can be complicated and risky. If you have the money to cover your loan payment and simply want to earn credit card rewards, it might make sense to use your credit card as a transaction method. But you should pay off your credit card balance immediately to avoid interest charges. If you’re looking to take advantage of a 0% APR balance transfer offer, make sure to read the fine print carefully and weigh the pros and cons before making a decision. Ultimately, taking on credit card debt to pay off your student loans should be a last resort, reserved for uncommon scenarios where it makes financial sense — not a regular occurrence.

Conclusion

As tempting as it may be, it’s usually not a good idea to pay your student loans with a credit card. Not only is it difficult to do, but the risks often outweigh the rewards. If you’re struggling to pay your student loans, there are other options available to you, such as income-driven repayment plans, deferment, or forbearance. You can also try to negotiate with your student loan servicer for lower interest rates or monthly payments. The most important thing is to be proactive and reach out for help when you need it.