Paying off student loans with a credit card is an ideal scenario for many borrowers.
Using a credit card to pay off student loans has two big advantages:
- Borrowers can quickly rack up credit card rewards and points, and;
- Borrowers can strategically use a 0% credit card into rates to save on interest.
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.
The silver lining for borrowers is that there are a couple of workarounds.
Work with a payment processing company
Companies like Plastiq will allow borrowers to make credit card payments towards student loans.
The process is relatively simple. The borrower tells Plastiq the name of the lender being paid. Plastiq charges the borrower’s credit card. Plastiq uses those funds to pay the lender.
Plastiq makes its money by charging a 2.5% transaction fee. This means a $100 lender payment will be charged as $102.50 to the borrower’s credit card.
Because of the high transaction fee, this approach usually doesn’t work for borrowers looking to earn rewards. Most credit cards max out at about a 2% reward rate, so using this approach would put most borrowers behind by .5% or more. The one exception would be for borrowers who are working towards a sign-up bonus with a credit card company. If the student loan payment helps meet the minimum spend requirement, it could make the transaction fee money well spent.
There are a couple of concerns specific to this strategy. First, borrowers should be certain they are working with a reputable company. The last thing they want is to be charged for the payment and then have the money not end up with the lender. The second issue is payment processing. Make sure you start the process with plenty of time before your balance is due. 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 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.
Borrowers who have fallen behind on payments and are now getting serious about their student debt will have the best chances of being successful with this approach.
Lenders each handle this situation differently, so your mileage may vary from one lender to the next.
When you call, one thing that can help is 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.
Credit Card Payments for Student Loans are Risky
Borrowers should keep in mind that the best-case scenario for this approach is that they will come out 1-2% ahead.
When it comes to student loan repayment, every little bit helps, but using credit cards comes with significant risks.
Borrowers taking advantage of a 0% introductory interest rate should be especially careful. When the rate jumps up to the “regular” interest rate, it could easily be above 20%. That is a financial time bomb. Anyone using the 0% interest rate to pay down student debt should be certain that they will be able to pay off the balance in full before the promotion expires.
If the strategy calls for jumping from one new card to the next to keep the interest rate at 0%, it is probably 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 be. If the numbers are tight, this difference might tip the scales.
Using a credit card to make student loan payments is one of those things that sounds great in theory, but in reality, it is a bust.
There are certainly a few circumstances where it can make sense, but for the most part, the effort required and the risk involved make it a bad option.