If you are struggling to make payments, you can use balance transfer checks or an intermediary service to transfer student loan debt to credit cards. An intermediary service, such as Plastiq, makes payments to the loan provider on your behalf. Making student loan payments with a credit card may have some benefits, depending on the card terms. But doing so also carries some serious risks. U.S. Department of the Treasury regulations prohibit lenders of federal student loans from accepting credit card payments. Although there are ways to get around these regulations, the real question you should ask yourself is: *Is it worth it? *
Written by Amy Carst.
Updated August 26, 2020
If you are struggling to make payments, you can use balance transfer checks or an intermediary service to transfer student loan debt to credit cards. An intermediary service, such as Plastiq, makes payments to the loan provider on your behalf. Making student loan payments with a credit card may have some benefits, depending on the card terms. But doing so also carries some serious risks.
U.S. Department of the Treasury regulations prohibit lenders of federal student loans from accepting credit card payments. Although there are ways to get around these regulations, the real question you should ask yourself is: Is it worth it?
Using An Intermediary To Make Payments
If you don’t have a checking account, or you simply don’t have enough money in your checking account to cover your student loan payment, an intermediary transaction may be worthwhile. Businesses like Plastiq accept credit card payments with a 2.5 percent fee, then send a check to your student loan servicer.
If your credit card rewards program exceeds that 2.5 percent fee, an intermediary transaction may actually work in your favor. Unfortunately, it is rare to find a rewards credit card offering more than 2.5 percent; most only give a max of 1.5 percent in the form of cash back rewards or equivalent points. In some cases, cards might double or triple points when you make travel or dining-related purchases, but the same does not apply to intermediary payments.
If, however, you are using an intermediary service for the sole purpose of making your monthly payment on time, the best credit cards to use are those that allow you to recoup the greatest portion of the 2.5 percent fee charged by the intermediary.
Similarly, if you have private student loans or federal student loans with a higher interest rate, it may be beneficial to pay a significant portion of those loans, or the full balance, through an intermediary service, thus shifting the balance to a credit card with a lower interest rate. But with most federal student loans having low interest rates, this scenario isn’t particularly common.
If you do find yourself with a high-interest rate loan, however, transferring the balance to a low-interest credit card may help. In fact, with many credit cards offering a zero percent introductory rate, this savings could be significant. But use caution; only do this if you are certain that your current student loan interest rate is very high (usually greater than 4.5 percent) and you are confident in your ability to pay off the credit card balance during that zero percent introductory period. Make sure you do the correct calculations before you decide to go this route.
In reality, there are generally more drawbacks than benefits to using a rewards card to make student loan payments. For starters, even when cash back rewards programs can be used to your advantage, you must have a zero percent interest rate and pay the full balance every month to make these rewards work for you. Otherwise, the outstanding balance will cancel out any rewards that you may have earned.
And even in the best case scenarios, using a credit card to pay your student loan can quickly become a slippery slope. Unexpected expenses can lead to an overwhelming credit card balance. If you become unable to pay your balance in full when you make your monthly payments, the interest rate on your student loan balance will quickly increase as it compounds along with the balance of your other charges and late fees.
Using Balance Transfer Checks To Make Student Loan Payments
You can also use a credit card-issued balance transfer check to make student loan payments if you’ve fallen behind, or you have an unusually-high interest rate on your student loan. Credit card companies often send these to cardholders when a new card is issued, and randomly throughout the life of the card. If you don’t have these checks on hand, however, you may be able to request them directly from the credit card issuer.
Balance transfer checks, which are essentially a cash advance, typically start with zero percent interest. But this promotional period is limited. Furthermore, cash advances don’t come free, or even cheap; the balance transfer fee is typically anywhere between one and five percent, with between three and five percent being most common. With such a high-initial fee, any cost savings are usually eaten up on day one.
What About Bankruptcy?
Another common question among individuals overwhelmed by student loan debt is whether or not student loans can be discharged in bankruptcy. This question becomes even more complex when student loan debt has been transferred to a credit card through an intermediary service or balance transfer check.
Let’s consider the first question: Can student loans be discharged in bankruptcy? The answer is technically yes, but it is not easy to have federal student loans wiped out in bankruptcy. If you have loans through private lenders, the process may be less complex. But to discharge federal loans, you must demonstrate that repayment would result in undue hardship. Proving undue hardship is no easy task, and doing so requires a separate adversary proceeding that takes place in bankruptcy court. Even if your creditors don’t challenge your request, the criteria for proving undue hardship in bankruptcy court is quite rigid. You will need to show that:
You would be unable to maintain a minimal standard of living if you had to repay the loan.
Your hardship will continue for an extended period of time, or permanently.
Prior to filing bankruptcy, you made good faith efforts to make payments on your student loan.
Based on its findings, the court may determine that your loan can be fully discharged, partially discharged, paid in full with more favorable loan terms, or that you must pay in full with no changes to the existing terms.
It is important to note, however, that while credit card debt is usually dischargeable in bankruptcy, it is not permissible to transfer student loan debt to a credit card with the intent to discharge it in bankruptcy. Even if it’s reorganized using other types of credit, student loan debt is still student loan debt, and it is exempt from automatic inclusion in bankruptcy. You can even find yourself in legal trouble if the court thinks you transferred the debt in an attempt to defraud your lender.
Fortunately, there are many different repayment options available to help student loan borrowers who are struggling to make payments. Some of these options include:
Deferment: If you are experiencing serious financial difficulties that may continue for an extended period of time, deferment allows you to postpone student loan payments until your hardship is over. Certain types of federal loans may not accrue interest during the deferral period.
Forbearance: If your financial hardship is likely temporary and you don’t qualify for deferment, forbearance may be an option. The main difference between deferment and forbearance is that loans in forbearance always continue to accrue interest charges, and thus grow. Neither deferment or forbearance are good long-term solutions.
Income-based repayment: If you believe that your inability to make full student loan payments is going to be a long-term situation, you may want to consider an income-based repayment plan (also called income-driven repayment). These plans base your monthly payments on your income, and payments can be as low as $0. Although interest may still continue to grow during an income-based repayment plan, any remaining balance will be forgiven after 20 to 25 years.
Your Credit Score
It is no surprise that filing bankruptcy takes a serious toll on your FICO score, but transferring student loan debt to credit cards can also have a negative impact. For starters, when you open any new line of credit, you lower the average age of your total accounts. Since lenders like to see long, established credit histories, opening new accounts can lower your credit score, at least temporarily.
Transferring student loan debt to a new credit card for the purpose of debt consolidation can also change your credit utilization rate and the number of hard inquiries on your credit report. If you do the balance transfer strategically and don’t incur new credit card debt while you’re still paying it off, you will likely see an improvement in your credit score over time. However, minor mishaps and unexpected expenses can quickly turn a good idea into a disaster. If you become unable to make your credit card payments, your credit limit will be decreased, you will lose any financial benefits realized by transferring your student loan balance, your credit card interest rates will skyrocket, and your credit score will plummet.
Upsolve Can Help
The bottom line is this: it’s technically possible to use a credit card to make payments on student loans, but it’s rarely a good idea to do so. This strategy generally only makes sense when unusual circumstances create a favorable outcome, or in an urgent situation that requires a temporary solution. Even in these cases, the initial plan can go awry if your personal finance situation changes. As such, if you are struggling to make student loan payments, it is preferable to consider alternatives to transferring student loan debt to a credit card.
If your financial situation is impeding your ability to make timely student loan payments, you may be eligible for deferral, forbearance, an income-based repayment plan, or even to discharge student loan debt in bankruptcy. Upsolve offers an extensive library of educational information on bankruptcy for low-income debtors. You can familiarize yourself with the many options of debt relief available to you by visiting our site today. It is also in your best interest to consult with an experienced bankruptcy lawyer if you believe that bankruptcy or debt settlement is the right choice for you.