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Yes, Paying for College with a Credit Card can be a Smart Decision

Running up credit card debt is risky, but there are times when paying for college tuition using a credit card is a good idea.

Written By: Michael P. Lux, Esq.

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There may be some debate about the severity of the student loan crisis, but what isn’t up for debate is the fact that student loans are becoming a serious issue for many Americans. As people learn the dangers of student debt, it is logical to ask: could paying for college using a reward-earning credit card be a good idea?

Strategic payment of tuition and fees using a credit card can make sense under the right circumstances. Students who have the necessary funds in savings and those receiving tuition payments form an employer may potentially benefit from using a credit card to pay for school. Students who are unsure of how they will pay off the debt should avoid credit cards.

In most cases, credit cards are a lousy alternative to student loans. When students are looking for a short-term loan, the credit card terms may yield some savings.

The Disclaimer: Don’t Thing of Credit Cards as a Student Loan Alternative

Paying for college using credit cards is typically a bad decision. If you just got denied on your student loan application and you are thinking about using a credit card to act as a student loan replacement, it is a bad idea. Instead, it might be time to revisit your original plan to pay for school.

The vast majority of students should have a strong preference for student loans over a credit card for paying tuition.

Student loans will almost always have better interest rates, repayment plans, and tax advantages.

However, in very limited circumstances, paying with a credit card is the savvy financial move. This article will examine those few instances where it makes sense to pay for school with a credit card.

Best Candidate – People Getting Reimbursed for Tuition

If your company is paying for school, using a credit card to pay tuition could make sense.

The most important detail for students going this route is to have a reliable employer. If the accounting department quickly and consistently issues checks for tuition expenses, a credit card can be used to cover the bill, and the balance can be paid in full before any interest is ever charged to the account. If reimbursements at work move slowly or there is a chance of the tuition benefit elimination, using a credit card is risky.

In this circumstance, credit cards offer two potential advantages over student loans. The first is on the way interest is charged. Student loans begin accruing interest from day one. Charges on a credit card don’t generate interest on the debt as long as the monthly statements are all paid in full. A second potential advantage to using a credit card is avoiding student loan origination fees. Some student loan lenders, including the federal government, charge a fee in addition to the interest on the loan. For example, borrowing a $3,000 student loan with a 4% origination fee means the borrower will have to pay back a $3,120 debt.

The downside to a credit card is that many schools pass credit card merchant fees onto the students. One study found that the average school charges a 2.62% convenience fee. Depending upon your school, fees for using a credit card could wipe away the benefit.

Paying for School Using a 0% APR Credit Card

A 0% APR credit card sounds great in theory. Pay for school, don’t get charged any interest… free student loan!

Unfortunately, the 20% or more interest rate the comes after the introductory APR is brutal. Opting for a 0% interest credit card without a plan to pay off the debt before the intro rate ends is a huge mistake. Standard credit card interest rates are playing with fire.

The one time the 0% APR credit card might tip the scales would be for people who get tuition reimbursement quarterly or every six months. If you know when you will be repaid and you can use a credit card with a low introductory rate as a short-term loan, it could be a great opportunity to save some money.

Racking Up Credit Card Rewards by Making Tuition Payments

Some students have money sitting in the bank set aside for tuition. Some parents have money in the bank set aside for tuition.

Using a credit card for the tuition and fees transaction might seem like a good opportunity to generate a ton of credit card rewards with very little effort.

Adding this extra step towards paying for classes does offer a huge potential benefit, but it can also come with major costs. The same study that found that schools charge an average of 2.62% for credit card convenience fees also found that over 90% of schools charge some form of credit card fee.

If your school happens to be an exception to the fee rule, it is a great opportunity to get points and rewards. However, in most cases, the value of the rewards won’t exceed the fee charged by the school.

The analysis is fairly straightforward. Credit card companies charge merchants a fee to accept the credit card. Credit card companies offer consumers rewards to encourage them to use credit cards. At the grocery store, customers come out ahead because food costs the same whether you pay cash or credit. Most colleges are not willing to pay merchant fees, so they pass the cost on to students. Credit card companies can’t be spending more money on rewards than what they get from merchants, so the merchant fee should almost always be more than the value of the rewards.

People who follow credit card rewards closely may find executions, such as using the credit cards to meet a minimum spend requirement to get a new customer bonus, but the exceptions are limited.

In the majority of cases, if the school charges a credit card fee, the fee will be greater than the value of the rewards.

Credit Cards and Tuition Payments

Paying for school using a credit card may sound great in theory, but in most cases, it is a lousy idea.

However, there are exceptions to the rule. If you have money set aside to pay for school and your school doesn’t charge a convenience fee, you can get some serious rewards points. If you will be reimbursed for your payment and need a very short loan, a credit card might be the right choice.

Credit cards don’t usually work for paying for school, but when they do, it can be pretty slick.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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