Should You Pay Student Loans With a Credit Card?

Some cards offer a quick way to make payments or consolidate debt, but there are pros and cons. Here's the info you need to make a smart decision.Image source: Getty Images.

Student loan debt has risen to epidemic proportion among Americans, with $1.5 trillion in loans outstanding. That's more than just about any other type of personal loan, and many people find that they have difficulty making the monthly payments on their student loans once they've found a job after finishing school.

But even though student loans are a big source of debt, especially for younger Americans, it's not the only one. Credit cards are another way that you can borrow for a wide variety of purchases, and some people have even taken the novel approach of trying to make student loan payments with a credit card. As attractive as that might sound, using a credit card to pay your student loans usually comes with a host of fees along with other dangers for the unwary, and that makes it a risky way to keep your student loan debt under control.

Can you even make loan payments with a credit card?

There are two ways that you might be able to pay your student loans with a credit card. You can try to make monthly payments using your card, or you can use a balance transfer to pay off your student loan in full, effectively moving the debt entirely to your credit card account.

Lending institutions don't typically accept credit cards for monthly payments on student loans. If you wanted to use your card to make a monthly payment, you'd probably have to get a cash advance, and then put the cash in a bank account from which you could send it to your student loan provider.

Balance transfers, on the other hand, are easier to set up. Credit card companies are used to dealing with other creditors, so once you give them the information about your student loan, they can typically work to get the balance transferred quickly and efficiently.

Alternatively, many credit cards give their customers balance transfer checks. You can use these either to pay off your loans in their entirety or to make monthly payments. Often, you'll even receive promotional offers that can reduce the interest rate on these balance transfers compared to what you'd ordinarily pay.

The pros and cons of using a credit card to pay student loans

The best thing about using credit cards to pay down student loans is that it gives you another way to make payments other than coming up with cash immediately. If you're in a position in which you can't afford to pay your student loans, turning to a credit card can save you from incurring late fees and suffering the hit to your credit score that a missed payment can cause.

In addition, in at least a few cases, a credit card can offer a lower interest rate than a student loan. That's typically limited to situations in which you're given a low promotional interest rate on a balance transfer, because regular credit card interest rates tend to be much higher than what you'd pay on all but the worst kinds of student loans.

However, there are substantial costs involved with paying student loans with a credit card. If you end up using the cash advance method to pay a loan, you'll typically have to pay a cash advance fee, which can be up to 5% of the amount that you borrow. In addition, most cards require you to start paying interest on the amount you receive in cash advances. That's the case even if you ordinarily pay your account balance in full, because the rules covering cash advances are different and don't usually have the same grace period that you'll receive on regular credit card purchases.

Balance transfers come with their own fees. Most cards charge an upfront fee that's equal to a percentage of the amount of the transfer. Minimum fees can apply, which can be disastrous in the case of making ordinary student loan monthly payments using a balance transfer. If you make a $100 payment and your card charges a $10 minimum fee, then you're effectively paying 10% -- which can be one to two years' worth of interest on the student loan.

Moreover, even if you use a balance transfer method that involves a low promotional rate, the big question is whether you can get your balance paid down in full before the promotional rate ends. For example, if you have a $10,000 student loan with a 5% interest rate and you have a chance to use a balance transfer with a 0% promotional rate, a 2% balance transfer fee, and 12 months to pay the debt down, then you can save hundreds of dollars in interest by doing the balance transfer. However, if you can't pay down the full balance in 12 months, then your regular credit card interest rate will apply -- and with rates of 15% to 25% or more being pretty common, it doesn't take long for that strategy to backfire.

Other pitfalls of substituting credit card debt for student loans

The other problem with using a credit card to pay your student loans is that once you do so, you no longer get any of the other benefits that your student loan debt might offer you. For example, some student loans give you the ability to earn partial or complete forgiveness of your outstanding loan under certain circumstances, such as if you work a certain number of years in public service. Other loans offer deferment or forbearance of interest or monthly payments if you return to school or qualify under other provisions. Most student loans also offer complete discharge in the event that you die before paying them off in full.

If you use a credit card to pay down your student loans in full, however, then you'll lose all those perks. No matter whether you return to school, lose your job, or end up in any other situation that would qualify for favorable treatment with a student loan, your credit card debt won't give you the same options. Your heirs could even end up paying the cost of your credit card debt -- even though it originally stemmed from your student loan borrowing.

Be careful with credit cards and student loan debt

Most of the time, it doesn't make sense to use a credit card to pay your student loans. In order to be a smart move, you have to find a situation in which the interest and other costs of credit cards are cheaper than what your student loan would charge. Although that can happen with some high-interest private student loans, it's still pretty rare.

You're better off doing whatever you can to pay down your student loan debt using conventional means. Trying to use a credit card only delays the inevitable -- and can put you in an even bigger hole financially if you're not careful.