There are many attractive credit cards that offer attractive benefits, such as 2% cashback or bonus mileage for select purchases. To cardholders, these attractive offers make it a good idea to use your credit card to pay off your student loan repayment plan to reduce your student loan balance and to earn credit card rewards.
It’s crucial to pay attention when it comes to personal finance. Although using credit cards to earn rewards sounds smart, it can lead to credit card debt. Here are some alternatives to managing student loan debt.
Alternatives to using your credit card to repay student loans
Due to high-interest rates and costly late fees, using a credit card to pay student loans can have serious drawbacks. Credit card companies are not entitled to the tax deduction for student loan interest and don’t offer the same protections student loan providers provide. Students who are unable to repay their loans on time should not use credit cards.
Not only are student loans not eligible for credit card payments, but so are federal loan servicers. Credit card companies view this as a violation of the rules that prevent companies from accepting credit card payments in order to make debt payments.
You don’t want to pay monthly bills and can’t afford a credit line, but you might consider these options for student debt.
Federal Student Loan Repayment Options
These repayment options are available to federal student loans holders:
Income-driven repayment plans (IDR). An IDR plan allows you to have your monthly payment based on your discretionary income. This extends your loan term. You can reduce your monthly loan payments depending on your income and your family size.
Forgiveness for student loans: If a direct loan is taken out by a government or non-profit organization, then you might be eligible to receive Public Service Loan Forgiveness (PSLF). This program allows the government to forgive your remaining loans if you make 120 monthly repayments and work for a qualifying employer for at least ten years.
Consolidation of Federal Loans: Multiple federal loans can be consolidated with a Direct Loan Consolidation Loan. If you do so, your repayment term can be extended up to 30 years. You’ll pay higher interest for a longer repayment period, but you will have a monthly payment that’s more affordable.
Forbearance or deferment: In the event of financial hardship (such as job loss), you can temporarily suspend your payments and not become delinquent.
Talk to your student loan provider to determine which options might be best for you to pay off your student loan.
Student Loan Refinance
Federal loan repayment options may not be for everyone. A student loan refinance is another option. You refinance debt by getting a loan from a private lender to cover the amount of the debt. The loan can then be used to pay off your current student loan. The new loan comes with different terms including a new interest and payment.
You may be eligible to receive a reduced interest rate or an extension of your loan term if your FICO credit score has improved. This could reduce your monthly payment.
Consider, for instance, that you have $30,000 in student loan debt at 7.00% interest. You would pay $348 monthly if you had a 10-year repayment period.
Your monthly payment would drop from $315 to $315 if your loans were refinanced and you qualified for a 10-year loan with a 4.75% APR. Plus, your interest payments would drop by over $4,000 during the loan’s life.
| Original Loan | Refinanced Loan | |
| Loan balance | $30,000 | $30,000 |
| Loan Terms | 10 years | 10 years |
| Interest rate | 7.00% | 4.75% |
| Minimum Payment | $348 | $315 |
| Total Interest | $11,808 | $7,751 |
| Total Repaid | $41,808 | $37,751 |
The student loan refinancing tool will help you determine how refinancing may affect your monthly payment.
Repaying student loan debts
You may feel tempted to use your credit cards to pay off student loan payments and earn rewards. However, this is not a wise decision. Plastiq charges an additional fee for every transaction. In addition to the high-interest rate and fees associated with cash advances, you will also have to pay a balance transfer fee. This means that student loan debt can be transferred to your credit card. You will also find that even the most expensive credit cards can have higher interest rates for outstanding balances than your student loan interest.