Student Loans

Can You Pay A Student Loan With A Credit Card

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 10 minute read

Tens of millions of recent and not-so-recent college and professional school graduates are seriously weighed down financially by their mountainous amounts of student loan debt. EducationData.org estimates that in 2020, the typical student loan borrower will have $37,584 in outstanding debt.

Public school graduates often have as much or more debt as their private university counterparts. The average amount of debt they have is $30,030, as reported by EducationData. The total amount of student loans in the United States hit $1.68 trillion in 2020, growing at a rate six times faster than the economy as a whole.

It’s not surprising that many would-be students are questioning the value of a college degree in light of the persistently growing cost of higher education and the widespread impact from the pay-to-play scandal at prestigious four-year universities. Unfortunately, this is not an option for people who have either already completed their degree or chosen not to continue their education. The bill will have to be paid by them. They’re struggling to keep their heads above water, and they need help desperately.

Many borrowers find that keeping up with their student loan payments requires a “all of the above” strategy that goes beyond simply setting up an automatic monthly payment and hoping that no unforeseen financial hardships arise in the decade or so before the final monthly payment or loan forgiveness date finally arrives.

Millions of people who have taken out private student loans and have strong credit might benefit from a low-interest credit card balance transfer, a part of the “all of the above” plan that receives less attention. Although a borrower with a typical income — or even a slightly above-average income — and a typical student loan balance of, say, $35,000 might not be able to pay off their entire student loan balance due to credit limits and cash flow realities, it is possible to make significant progress toward paying off the loan.

This technique can significantly lower student debt balances and cumulative interest commitments within a single 12- to 24-month low-interest balance transfer period. It can be the deciding factor in paying off student loans ahead of schedule if done frequently enough.

There are some drawbacks to pursuing this method of refinancing student loans. Some are self-evident, such as carrying a load from one credit card to another and then failing to pay it off before the introductory low-interest period ends and being stuck with a standard credit card interest rate that is several times greater than the interest rate on the initial loan. Some of these effects, including a borrower’s decreased future chances of being approved for credit due to an excessively high usage rate, are more obscure.

Using Low-Interest Credit Cards to Pay Off Student Loans: Planning and Procedure

You should think carefully before doing a balance transfer on a credit card. It’s important to evaluate the pros and downsides of consolidating some of your student loans with a credit card balance transfer before making an application.

Managing the refinancing process, avoiding unnecessary fees by making responsible use of the balance transfer feature, and selecting the most appropriate balance transfer card are all essential if you reach this conclusion.

  1. Determine Whether You Qualify for a Credit Card Balance Transfer

The first step in completing a credit card debt transfer is figuring out if you qualify. If you aren’t a strong applicant, it’s best to wait a few months and work on strengthening your credentials.

Your credit rating should be your first priority. Good or exceptional credit is typically required to qualify for the low or 0% APR debt transfer deals. The likelihood of being approved for a credit card decreases if your FICO score falls below 700, however this threshold varies by card issuer and issuer.

See where you are financially by looking at your credit report. If your overall score isn’t satisfactory, you should attempt to strengthen the areas that require it the most. Paying bills on time and reducing your credit card balances can improve your credit score, but it might take months for these variables to have a noticeable impact on your score.

Pay close attention to your credit usage ratio, which is the sum of your current credit card balances (the numerator) divided by your entire credit limit (the denominator), since it is one of the most important factors in determining your credit score (the denominator). Transferring a balance between two “normal” credit card accounts has no negative effect on the borrower’s credit usage ratio.

This is because the balance already exists on another credit card, thus there is no net increase to the numerator. Transferring a student loan amount to a new credit card might have a negative effect on credit use because student loan balances are not considered utilized credit.

As a result, you may see a temporary drop in your credit score and your ability to get new credit may be affected. If you’re trying to get ahead financially by paying off your student loans quickly so you can apply for new credit soon, like a car loan or a mortgage, this might be an issue.

  1. Federal student loans should be excluded from balance transfer consideration.

You shouldn’t even consider switching your federal student loans to another institution. This tactic should only be used for non-government funded education expenses.

Why? Because there are a number of borrower-friendly features built into federal student loans, including the ability to postpone or reduce payments during times of economic hardship (these features are called by a number of different names, such as deferral, forbearance, and modified repayment plan).

Additionally, its borrowers are immediately qualified for federal student assistance programs, such as the temporary suspension of student loan payments during the coronavirus outbreak. There are built-in forgiveness timelines for federally supported student loans, with as low as 10 years of qualifying payments for borrowers with eligible public sector positions and 20 years for most other borrowers.

These advantages are not theoretical. They can be the deciding factor between scraping by and having to make difficult decisions in order to keep one’s financial head above water in times of extreme monetary stress. Federal borrowers who haven’t consolidated or moved their debts are the only ones eligible for them. After making a balance transfer, you will be left with a less versatile kind of credit.

  1. Loans with higher interest rates should be prioritized.

Reducing the total (lifetime) cost of your student loans may be accomplished reliably by focusing on the loans with the highest interest rates first. By applying a larger portion of your monthly payment toward the main balance instead of the interest, this strategy can hasten the end of your loan. Also, it facilitates the process of identifying a suitable replacement card with a more favorable interest rate.

Finding the highest-interest balance that is also small enough to transfer in full (i.e., less than your balance transfer card’s authorized credit line) is the holy grail of balance transfers. However, until your application is accepted, you won’t know the exact amount you may transfer.

  1. Confirm if your loan servicer accepts balance transfer payments and how they would want to be paid.

Verify with your student loan servicer that they accept credit card debt transfers as a form of payment in full before you apply for a balance transfer credit card. Considering that loan servicers, like anybody else, need to make money, it’s reasonable to assume that this will be the case. However, you should take precautions to avoid any unpleasant surprises.

Do the same with the card companies from whom you intend to request applications. Even while most major issuers support transferring student loan balances, it’s still a good idea to contact and make sure.

If the method differs from a standard card-to-card transfer, you should also find out how your loan servicer desires to be paid and how your issuer wants to make the transfer. See to it that they work well together. If the card issuer wants to pay the student loan servicer directly to complete the transfer, but the servicer will only take payment from the borrower, then you may need to convince the card issuer to give you a check for the amount of the transfer.

Again, servicers just want to get paid, so this shouldn’t be an insurmountable barrier, but it might mean additional work for you. And if the issuer does write you a check, be sure it is for a balance transfer and not a cash advance, which is not eligible for a promotional low or 0% APR rate and may incur extra costs.

  1. Determine the Amount to Transfer

Avoid transferring more than you can afford to pay off with your new interest-free term if you want to avoid paying fees on your credit card debt transfer. In order to avoid paying more in transfer fees than the initial loan amount, it is preferable to make several smaller transfers than one large one.

A low-balance, high-interest loan is suitable for transferring to a credit card with a low or no interest rate since it fits within the limits of the card’s permitted credit line and can be paid off in one lump sum. There are four benefits, provided the amount is paid in full by the end of the promotional period:

  1. You will repay a complete loan without paying any further interest.
  2. The elimination of one entire debt from your ledger will raise your spirits and make the remaining of your student loan obligations appear more manageable.
  3. Assuming that your income and expenditures do not change, you will have more money to pay down your outstanding student debts.
  4. In the meanwhile, your credit score is likely to rise, making you more appealing to lenders and opening the door to future low-interest balance transfer offers that you may utilize to pay off student debt – perhaps with increased credit limits.
  5. Evaluate Balance Transfer Card Offers and Comprehend Transfer Fees

Look at the fees, interest rates, and credit limit when deciding which debt transfer card is best for you.

  • Interest Rate Discount. The interest-free term advertised by balance transfer offers is a common incentive for new applicants. If you’re eligible, taking such an offer over a less generous one is a no-brainer. Existing cards are more likely to receive low interest rate offers, often between the range of 1% to 10% APR. An interest rate reduction of four percentage points, from eight percent to four percent, for example, would make the move worthwhile.
  • Duration of Incentive Program. The following has to be stated again and over again: It’s crucial that you settle your balance transfer in full before the conclusion of the introductory period. If you don’t, you could have to pay interest on the whole amount of the transferred balance, backdated to the date of the transfer, not simply the amount that’s left over after you pay off other bills. That will likely be enough to wipe away any savings you may have accumulated. As a result, you should prioritize deals with very lengthy low-APR or 0% APR durations, ideally at least 12 months but ideally 15 or 18 months, as this will allow you to make a larger transfer without incurring as much interest.
  • Transaction Costs. Fees for transferring a balance are normally between $30 and $50 every $1,000 moved, or 3% to 5% of the transferred amount. It may not seem like much, but balance transfer fees may quickly add up, especially for smaller transfers. For instance, if it takes you six months to pay off a balance transfer that costs you 3%, you will end up paying 6% (annualized) for the privilege. Make sure the balance transfer costs won’t exceed the interest you’d pay on the original loan during the repayment period before committing to the transfer. If you do, you’d be better off not making the switch and instead putting that money toward paying down the debt.
  1. Don’t Expect to Transfer Any Remaining Balance After the Promotional Period.

In the long run, your credit score should increase if you use a credit card balance transfer to pay off all or most of your student loans.

You shouldn’t, however, count on being able to keep the good times rolling by transferring the leftover money from your first transfer card to a new transfer card after the promotional period on the first card ends. You shouldn’t count on getting that new card immediately.

Believe me, after demonstrating that you can pay down a sizable transferred sum, you’ll have plenty of additional balance transfer options to choose from. However, the stakes are too high if you don’t, and you end up owing hundreds of dollars in interest on your outstanding bill.

The best course of action, then, is to make plans to repay the whole sum of your transferred student loans before ever considering a second transfer. If you’re in a hurry and your credit is strong enough, you can initiate extra balance transfers simultaneously. Again, as the end of the promotional period approaches, please do not forget to pay off any outstanding balances.

Bottom Line

Credit card balance transfers are a common way for those with a lot of debt to pay down or get rid of their high-interest credit card debt. A less-discussed tactic for managing college debt supported by private lenders is to shift balances to credit cards providing low-interest promotional periods.

A good plan of action, but not a panacea. If the debt is not paid off in full before the end of the promotional period, interest will be charged at a substantially higher rate than the average federal or private student loan. If not handled properly, this solution to the problem of student loans might end up making things even worse.

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