Can I pay my Student Loans with my Credit Card?

Paying off student loans with a credit card might seem like an ideal solution for many borrowers.

Repaying student loans with a credit card can have two major benefits:

1. Earning Rewards: By using a credit card, borrowers could quickly accumulate rewards and points, which can be valuable for travel, cash back, or other benefits.
2. Saving on Interest: Utilizing a credit card that offers a 0% introductory rate can provide substantial savings on interest payments, especially if the balance can be paid off before the introductory period ends.

Unfortunately, student loan lenders are not very accommodating. Instead of being willing to pay merchant fees, they require borrowers to make payments via a check or bank transfer.

Unfortunately, many student loan servicers do not accept credit card payments directly due to the merchant fees involved. They typically require payments to be made through checks or bank transfers, which can be a significant limitation for those looking to leverage credit card benefits.

Despite this challenge, borrowers have a couple workarounds to consider.

Work with a payment processing company

Companies like Plastiq enable borrowers to use credit cards for their student loan payments.

The process is relatively simple. The borrower provides Plastiq with the lender’s details. Plastiq charges the borrower’s credit card. It then uses those funds to pay the lender directly.

Plastiq makes its money by charging a transaction fee. At the time of writing, this fee is 2.9%. This means Plastiq will charge the borrower’s credit card $102.90 for a $100 payment to the lender.

Because of the high transaction fee, this approach usually doesn’t work for borrowers looking to earn rewards. Most credit cards offer a maximum reward rate of about 2%. In the case of Plastiq, this approach would result in a net loss of at least 0.9%. However, borrowers working towards a sign-up bonus with a credit card company might find this approach worthwhile. If the student loan payment helps meet the minimum spending requirement, it could make the transaction fee money well spent.

When using this strategy, you should keep a couple of considerations in mind.

1. Reputation: You should be certain you are working with a reputable company. The last thing you want is to be charged for the payment and the money not end up with the lender.
2. Timing: Make sure you start the payment process well in advance of your student loan payment due date. A processing issue could cause the wrong account to be credited or cause a delay and a late fee.

Convince your lender a credit card is the only way they will get paid

The problem with making credit card payments towards student loans isn’t that lenders can’t process credit card payments. The issue is that they don’t want to.

Instead of making a payment through the typical payment portal on the student loan website, call in and ask to make a credit card payment. Explain that payment via credit card is the only way you will be able to make your payment at the moment.

Borrowers who have fallen behind on payments and are now getting serious about their student debt will have the best chance of success with this approach.

When you call, it is helpful to ask the representative whether or not they have the authority to accept and process credit card payments. If they are not permitted to do so, ask to speak to someone who does.

Keep in mind, lenders differ in how they handle these requests, so the outcome can vary significantly from one lender to the next. This method requires persistence and may not always work, but it can be a viable option in certain situations.

Credit Card Payments for Student Loans are Risky

Borrowers considering using credit cards to pay off student loans should weigh the potential benefits against the risks carefully.

The best-case scenario from this approach might be a small net gain of 1-2%. While every little bit helps when it comes to student loan repayment, the gains from using a credit card could be minimal as compared to the risks.

Borrowers taking advantage of a 0% introductory interest rate should be especially careful. Once the introductory period ends, the interest rate jumps up to the “regular” interest rate. This rate could easily be more than 20%. That is a financial time bomb. To avoid this pitfall, anyone using the 0% interest rate to pay down student debt should be certain they can pay off the full balance before the promotional rate expires.

If your strategy involves continually transferring balances to new cards to maintain a 0% interest rate, then this approach is inadvisable. This strategy involves juggling multiple accounts and deadlines, and a single misstep could result in high interest charges. It’s generally just too risky and not worth doing.

Another factor to consider is the tax implications. Credit card interest cannot be deducted, but student loan interest can. If the numbers are tight, this difference could make using a credit card less financially advantageous than it appears.

Final Thoughts

Using a credit card to pay off student loans might seem like a clever strategy on paper, but in practice, it often falls short.

While there are specific situations where it might make sense, generally speaking, the complications and risks associated with this approach tend to outweigh the benefits. The effort to manage this method—keeping track of interest rates, handling balance transfers, and dealing with potential tax implications—can make it a less appealing option. For most borrowers, simpler and safer repayment strategies are usually more advisable.