We are approaching the conclusion of September and you are aware that the Fresh Start student loan benefit period is coming to a close. It is reasonable to be curious: How can one cope with such a difficult situation – non-payment? An interesting idea comes to the reader’s mind: is it possible to pay off the debt of a student loan with a credit card?
It is an appealing concept when one is in a hot spot but there are other considerations as with most financial decisions.
Can You Pay a Student Loan with a Credit Card?
The quick response is: no, not in that way. Most student loan servicers, particularly those specializing in federal loans, tend to not have credit card payments. The reason? Because of general federal restrictions, such practice is not encouraged by loan servicers who would also rather not incur the costs of credit card processing.
Whenever you use your card, the service provider (loan servicer in this case) pays the bank a fee (approx. 2-3% of charges). Retailers can include these expenses in their prices whereas student loan agencies do not want to bear this expense. Therefore, credit cards are not accepted for payments. However, that does not necessarily mean that it is impossible.
Using Intermediary Services
You may have heard of intermediary services like Plastiq. These services allow you to pay a bill with your credit card, and they send a check on your behalf. However, it comes with a catch: fees. For instance, Plastiq charges a 2.9% fee on every transaction.
Let’s say your monthly student loan payment is $500. If you use Plastiq, they’ll charge your card $515, and then send the $500 to your lender. Now, while your student loan stays current, you’re $15 deeper in debt, and that new debt is at a credit card’s higher interest rate. In the long run, you’ll be paying more just to avoid a short-term crunch.
Chasing Credit Card Rewards?
Maybe you’re considering using a credit card to rack up rewards, like cash back or points. You’re thinking, “I’m already paying $500—why not get something for it?” But with processing fees wiping out most, if not all, of the reward value, this is a losing game.
What About a 0% APR Credit Card?
Another option might be transferring your student loan balance to a 0% APR credit card, sparing you interest in the short term. It sounds attractive, but there’s a catch. Even with no interest initially, you’ll still face those processing fees, and once the 0% promotional period ends, the interest rates can skyrocket if you haven’t paid it off in full.
So, unless you can pay off the balance within the promotional period, this solution might leave you worse off than before.
Better Alternatives to Credit Cards
If you’re struggling to make payments, there are better alternatives than using a credit card.
Enroll in an Income-Driven Repayment Plan: These plans adjust your federal student loan payments to a percentage of your discretionary income. If you’re unemployed, your payments could drop to $0.
Request Deferment or Forbearance: If you need temporary relief, consider requesting deferment or forbearance. Both options allow you to pause payments, though interest may still accrue, increasing the total loan balance in the long term.
The Bottom Line
Using a credit card to pay off your student loans is seldom a good idea. The fees, interest rates, and potential for long-term debt can make a difficult financial situation even worse. Instead, explore other options, like income-driven repayment plans or temporary payment pauses, to keep your finances under control after Fresh Start ends on Sept. 30.
