As a college student, my unsubsidized federal loans are definitely weighing on my mind. I’m not required to pay the loans yet, but the time is coming when I will be. At least paying the accrued interest saves me money in the long run.
My goal is to pay as I go, but either way, student loans have to be paid. I’ve seen a lot of advice about how consolidating and refinancing your student loan is a good choice for those struggling to make their loan payments. In general, though, no one recommends paying your student loans with a credit card. Until now. Maybe.
The problem with paying student loans with a credit card, as you may already know, is that student loan servicing companies charge considerably lower interest rates than credit card companies.
It’s usually best to keep your student loans with their third-party servicing company until you’ve paid them off. Right? Maybe not.
What if you could earn cash back, instant signup bonuses, improve your credit score, and take a significant chunk out of your total student loan debt? Sound too good to be true? It could be, but maybe not.
Here is the scenario where it just might work for you.
- The Loan Company Accepts Credit Card Payments. This point may eliminate using credit cards as an option for you as many student loan companies don’t take credit card payments at all, while others charge a transaction fee. If they charge a fee, this likely negates the point of getting cash back or bonuses from your credit card provider. The reasons for this vary from one company to another, but it’s generally a practice that protects both lender and borrower.
- You Have Really Good Credit. If you don’t have good credit there’s no point in messing with credit cards at all. You’re not going to get good terms, period. Stick with plan A and pay off your loans directly. Better yet, pay off any other outstanding debts with higher interest first. If you do have good credit, there are a few rewards cards out there that might just make it worth your while to manipulate the system. For instance, some new cards offer up to 2% cash back on purchases, and sign-up bonuses up to $500.
But Wait. There’s a Catch
The catch is that you have to be someone who pays your entire credit card bill every month, or sign-on bonuses and cash back will just be going back to the credit card company in the form of interest. There are also temporary disadvantages to your credit score if you use a large amount of your available credit all at once. However, subsequently paying that amount off should offset any disadvantages.
Secondly, you’ll need to ensure that your student loan payment is not processed as a cash advance, but designated a regular purchase. This could be very bad for your credit. Talk to your card company before making the payment, and always double check your statement.
Make Money While Paying Off Debt
If you meet this criteria, be sure to shop around for the best rewards and sign-on bonus options. Again, this is not a good idea if you can’t manage to pay off your credit card each month. You’ll still need to have the cash to pay the credit card company each time you make your student loan payment. Otherwise, you’re just racking up your credit card balance and paying a higher interest rate versus your loan provider.
On the other hand, a good credit score and good financial habits could enable you to get paid to pay off your student loans. It’s definitely something to consider.
How do you pay off your student loans? Would you consider using a credit card to earn rewards and bonuses?
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