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If you’re in danger of missing a student loan payment and don’t have enough cash in the bank, you might be considering other options — such as paying student loans with a credit card.
Most student loan servicers don’t allow you to make payments with a credit card. While there are some potential workarounds (like cash advances or third-party services), using a credit card to make student loan payments comes with some major drawbacks.
Here’s what you should know about paying student loans with a credit card:
Can you pay student loans with a credit card?
Some private student loan lenders accept credit card payments under certain circumstances, but federal student loan servicers do not.
This is because the U.S. Treasury Department instituted rules that forbid credit cards from being used to pay debt obligations — including student loans. You can only make payments on your federal student loans from your checking or savings account.
However, there are some loopholes that allow you to use your credit card to make payments. For example, some third-party services — such as Plastiq — will facilitate using a credit card to make loan payments.
With Plastiq, you can make loan payments via ACH transfer, check, or wire transfer after submitting the information for your servicer and your credit card information.
Check Out: When to Refinance Student Loans
Paying student loans with a credit card could cost you in the long run
If you’re struggling to keep up with your payments, using a credit card to make your payments and avoid having any student loans in default can seem like a good idea. But using a credit card for your payments can have costly consequences:
- Cash advance fees: Most credit cards charge you a fee to take out a cash advance that is separate from the interest charges. For example, the fee might be 5% of the loan amount or $10, whichever is greater. If your loan payment was $300, you’d pay a $15 fee for a cash advance.
- Interest charges: Interest rates on credit cards are usually much higher than student loan interest rates. Federal student loans taken out for the 2020-21 academic year have rates as low as 2.75%. The average interest rate on credit cards, on the other hand, is 16.43% as of Aug. 2020, according to the Federal Reserve.
- Fewer protections: Student loans typically have more repayment benefits than credit cards. If you can’t afford your payments or are facing financial hardship, you could be eligible for deferment, forbearance, or alternative repayment plans. Credit cards don’t offer those protections, which means you’re on the hook for payments even if you lose your job or have a medical emergency.
- Higher debt-to-income ratio: By shifting your payments to credit cards, you’re increasing the amount of debt you have. This will cause your debt-to-income (DTI) ratio to rise. A higher DTI ratio can negatively impact your credit score and make it difficult to qualify for other forms of credit.
Alternatives to paying your student loans with a credit card
While there are ways to pay student loans with a credit card, it’s typically a bad idea. If you’re in danger of missing student loan payments, consider these other strategies instead:
Apply for deferment or forbearance
If you’re unemployed or facing another financial hardship, you might be eligible for student loan deferment or forbearance, which allow you to temporarily postpone your loan payments.
Federal student loans are eligible for up to 12 months of deferment or forbearance. Some private lenders also provide deferment and forbearance options.
For example, College Ave offers up to 12 months of forbearance for borrowers experiencing hardship, typically in three- to six-month increments.
Contact your student loan servicer
If you’re ineligible for forbearance or deferment, contact your loan servicer to discuss your options. Some lenders offer alternative payment plans that allow you to make lower student loan payments in cases of temporary hardship.
For example, RISLA offers an income-based repayment program. If you qualify, RISLA will extend your repayment term up to 25 years and cap your monthly payment at a percentage of your income.
Apply for income-driven repayment
If you have federal student loans, you’ll likely qualify for an income-driven repayment (IDR) plan. Under an IDR plan, your monthly payment is determined by your discretionary income and family size.
There are four IDR plans available:
- Income-Based Repayment (IBR): The IBR plan is available to borrowers who can demonstrate financial hardship. Your payments will be capped at 10% to 15% of your discretionary income, depending on when you took out your loans — though you’ll never pay more than what you would under the Standard Repayment Plan. Under IBR, you could have your loans forgiven after 20 to 25 years of payments.
- Income-Contingent Repayment (ICR): With ICR, you’ll pay the lesser of either 20% of your discretionary income or what you’d pay with fixed monthly payments over 12 years. You could have the remainder of your balance forgiven after making 25 years of payments.
- Pay As You Earn (PAYE): Your payment will be capped at 10% of your discretionary income on PAYE and will never exceed what you’d pay under the Standard Repayment Plan. Like IBR, you must demonstrate financial hardship to qualify for PAYE. Under this plan, you could be eligible for loan forgiveness after 20 years of payments.
- Revised Pay As You Earn (REPAYE): You’ll generally pay 10% of your discretionary income under REPAYE, though there’s no payment cap like the other IDR plans. Depending on whether you have undergraduate or graduate student loans, you could qualify for forgiveness after paying for 20 to 25 years.
Check Out: Refinance Student Loans With Bad Credit
Consolidate your student loans
Another option for federal student loan borrowers is a Direct Consolidation Loan. If you consolidate your loans, you can extend your repayment term up to 30 years.
While your interest rate won’t change (the interest rate on a consolidated loan is based on the weighted average of your previous debt), a longer term could reduce your payments.
If you have Parent PLUS Loans, consolidating them will also make you eligible for the ICR plan.
Learn More: Consolidate Private Student Loans
Refinance your student loans
Another potential way to make your loans more manageable is to refinance your student loans. If you refinance student loans, you could qualify for a lower interest rate. Or you might extend your repayment term, which will likely reduce your student loan payment.
If you decide to refinance, be sure to consider as many lenders as possible to find the right loan for you. Credible makes this easy — you can compare your prequalified rates from our partner lenders in the table below in two minutes.
There are better ways to catch up on your student loans
While paying student loans with a credit card might be appealing, it could cost you over the long run. Credit cards typically have high interest rates and fees, and they come with fewer protections than student loans.
If you decide that refinancing could help you manage your loans, remember to shop around and compare as many lenders as you can. This way, you can find a loan that fits your needs — which might include a lower interest rate or extended repayment term. You can easily compare multiple lenders with Credible after filling out a single form.
Use our calculator below to see how much you can save by refinancing your student loans.
Step 1. Enter your loan balance
Step 2. Enter current loan information
Step 3. Enter your new loan information to start calculating your savings
Increased Lifetime Cost
New Monthly Payment
Increased Monthly Cost
If you refinance your student loan at
interest rate, you
will pay an additional
monthly and pay off your loan by
The total cost of the new loan will be
Does refinancing make sense for you?
Compare offers from top refinancing lenders to determine your actual savings.
Checking rates won’t affect your credit score.
Martin Lewis issues guidance on using credit cards to build ratings – best deals | Personal Finance | Finance
Martin Lewis regularly urges savers to use caution when utilising debt themed products but at the same time, he acknowledges the need for a decent credit rating to get by financially. Today, the Money Saving Expert was questioned by viewer Miranda on how one can build their credit rating in difficult circumstances.
“What I’d then like you to do is go and do £50 a month of normal spending on it, things you’d buy anyway.
“[Then] Make sure you pay the card off in full every month, preferably by direct debit so you’re never missing it because the interest rate is hideous.
“That way you won’t pay any interest.
“You do that for a year, you’ll start to build that credit history, showing them you’re a good credit citizen.
“Then you’ll be able to move into the sort of more normal credit card range.
“So, bizarrely, to get credit you need credit. What credit will you get? Bad credit, go get the bad credit just make sure it doesn’t cost you.”
Consumers of all kinds may not have the best options at the moment as recent analysis from moneyfacts.co.uk revealed.
In mid-November, they detailed that a number of high street banks have cut the perks and interest on a number of their current account deals.
On top of this, the Bank of Scotland and Lloyds Bank made credit interest cuts of up to 0.5 percent.
Rachel Springall, a Finance Expert at moneyfacts.co.uk commented on the few options consumers and savers currently have available: “Clearly, it is vital consumers decide carefully if now is the time to switch, but if they wait too long, they may well miss out on a free cash switching perk.
“At present, providers will be assessing how they can sustain any lucrative offers in light of the pandemic.
“With this in mind, we could well see more changes in the months to come and if this does indeed occur, consumers would be wise to review whether their account is still worth keeping.”
Should you use a balance transfer to pay off debt?
A balance transfer might be the solution if you have debts and want to gain control over your finances. But whether a balance transfer is right for you will depend on a number of factors.
Things to consider before using a balance transfer
The size of your debt
If you want to apply for a balance transfer credit card, be aware that most providers will allow you to transfer up to 90% of your credit limit.
Your credit limit will be dependent on your own personal circumstances, including your salary, your credit history and your residential status (homeowner or renter).
Be realistic about your debt. For example, if you earn £25,000 per year and you have a debt of more than £15,000, a balance transfer might not be cheapest way to pay the debt.
The time taken to pay the debt
The main advantage of a balance transfer credit card is that many offer an interest-free period on the balance. So, if you can pay off your balance in that period, you won’t accrue any further interest charges.
However, these periods typically range from 18 to 24 months, so if you think you will need more time to pay the debt, you may need to factor in additional interest charges when the interest-free period ends.
Whether or not a balance transfer is the right debt payment solution will depend on your personal circumstances. Check our balance transfer calculator if you want to work out how much a balance transfer could save you in interest payments.
Your credit score
The advantage of a good credit score cannot be underestimated in this situation.
When applying for a balance transfer credit card, the company will check your credit score. Based on this score, they could refuse your application.
Even if you are accepted, if you have a bad credit score they could reduce your credit limit. Ultimately, this will determine the benefit of a balance transfer as a suitable debt payment solution.
If you think your credit score might be a problem, it’s worth checking with the credit reference agencies before applying. That way you can avoid any nasty surprises.
Alternative solutions to balance transfers
You could still use a balance transfer even if the size of your debt is bigger than the credit limit.
Transferring part of the debt would enable you to benefit from any interest-free period, where applicable.
Alternatively, if you have multiple debts, you could consolidate all of your debts so that you can make a single regular payment. If necessary, you could do this using an unsecured personal loan over a period longer than 24 months.
Look at your own personal circumstances with a critical eye. Remember that you need to factor in living expenses when thinking about how long it will take you to pay off your debt.
Balance transfers are a useful method for debt repayment, but be aware that credit cards are an expensive way to borrow money. Take full advantage of any 0% deals wherever possible. Check out our list of the best 0% credit cards.
Some offers on MyWalletHero are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.
Turn credit declines into a win-win | 2020-11-20
The pandemic has left millions of people needing credit at a time when lending standards are tightening. The result is a lose-lose situation—the consumer gets a bad credit decline experience and the credit union misses out on a lending opportunity. How can this be turned into a win-win?
The case for coaching
Let’s start by deconstructing the credit decline process: The consumer is first encouraged to apply. The application process can be invasive, requiring significant time commitment and thoughtful inputs from the applicant.
After all that, many consumers are declined with a form letter with little to no advice on actions the applicant can take to improve their credit strength. It is no wonder that credit declines receive a poor Net Promoter Score (NPS) of 50 or often much worse.
On the flip side, forward-looking credit unions provide post-decline credit advice. This is a compelling opportunity for several reasons:
- Improved customer satisfaction. One financial institution learned that simply offering personalized coaching, regardless of whether or not consumers used it, increased their customer satisfaction by double digits.
- Future lending opportunities. Post-decline financial coaching can position members for borrowing needs even beyond the product for which they were initially declined.
- Increased trust. Quality financial advice helps build trust. A J.D. Power study noted that, of the 58% of customers who desire advice from financial institutions, only 12% receive it. When consumers do receive helpful advice, more than 90% report a high level of trust in their financial institution.
Provide cost-effective, high-quality advice
AI-powered virtual coaching tools can help credit unions turn declines into opportunities. Such coaches can deliver step-by-step guidance and personalized advice experiences. The added benefit is easy and consistent compliance, enabled by automation.
AI-based solutions are even more powerful when they follow coaching best practices:
- Bite-sized simplicity. Advice is most effective when it is reinforced with small action steps to gradually nurture members without overwhelming them. This approach helps the member build momentum and confidence.
- Plain language. Deliver advice in friendly, jargon-free language.
- Behavioral nudges. Best-practice nudges help customers make progress on their action plan. These nudges emulate a human coach, providing motivational reminders and celebrating progress.
- Gamification. A digital coach can infuse fun into the financial wellness journey with challenges and rewards like contests, badges, and gifts.
Virtual financial coaching, starting with reversing credit declines, represents a huge market opportunity for credit unions. To help credit unions tap into that opportunity, eGain, an award-winning AI and digital engagement pioneer, and GreenPath, a leading financial wellness nonprofit, have partnered to create the industry’s first virtual financial coach. To learn more, visit egain.com.
EVAN SIEGEL is vice president of financial services AI at eGain.
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