Conquer your student debt. Refinance now.
Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.
So many credit cards have enticing offers, like 2% cashback or bonus miles that you can earn on select purchases. With such attractive deals available, using your credit card as a part of your repayment plan to pay down your student loan balance to rack up credit card rewards can seem like a great idea to cardholders.
But when it comes to personal finance, it’s important to pay attention to the details. While using your credit cards to earn rewards may sound like a smart strategy, it can backfire and lead to credit card debt. Here are some alternative ways to manage your student loan debt.
Alternatives to Using a Credit Card to Pay Student Loans
Using a credit card to make student loan payments has significant drawbacks due to the costly late fees, hitting your credit limit, and high credit card interest rates. And, credit card companies don’t have the same protections that student loan providers offer, and aren’t eligible for perks like the student loan interest tax deduction. If at all possible, student loan borrowers should avoid using a credit card to make loan payments.
It is also important to note that federal loan servicers and many private loan servicers do not accept credit card payments for student loans. Credit card companies see this as a violation of the rules that disallow companies from accepting card payments to make debt payments.
If you were hoping to use a credit card because you can’t afford your current monthly payments, consider these alternatives for your student debt.
Federal Student Loan Repayment Options
If you have federal student loans, you can take advantage of the following repayment options:
Income-driven repayment (IDR) plans: With an IDR plan, your loan servicer bases your monthly payment off your discretionary income and extends your loan term. Depending on your income and family size, you could dramatically reduce your monthly loan payment.
Student loan forgiveness: If you work for a non-profit organization or the government and have a Direct Loan, you could be eligible for Public Service Loan Forgiveness (PSLF). Under this program, the government will forgive the remainder of your loans after you make 120 monthly payments while working for a qualifying employer for ten years.
Direct Loan Consolidation: If you have multiple federal loans, you can consolidate them with a Direct Consolidation Loan. When you do so, you can also extend your repayment term up to 30 years. While you’ll pay more in interest with a longer repayment term, you’ll have a more affordable monthly payment.
Deferment or forbearance: If you’re going through a financial hardship, like a job loss, you can temporarily postpone your payments without becoming delinquent.
Connect with your student loan servicer to learn which options are right for you.
Student Loan Refinancing
Federal loan repayment options aren’t for everyone. Another alternative to consider is student loan refinancing. When you refinance your debt, you take out a loan from a private lender for the amount of your existing debt and use the loan to pay off the current loans. The new loan has different terms, including a new interest rate and payment.
If your FICO credit score has improved since you took out your original student loans, you could qualify for a lower interest rate or extend your loan term, reducing your monthly payment.
For example, let’s say you had $30,000 in student loans at 7.00% APR. With a 10-year repayment term, your monthly payment would be $348 per month.
But if you refinanced your loans and qualified for a 10-year loan at 4.75% APR, your monthly payment would drop to $315 per month. Even better, you’d save over $4,000 over the life of your loan in interest charges.
|Original Loan||Refinanced Loan|
|Loan Term||10 Years||10 Years|
Use the student loan refinancing calculator to find out how refinancing could affect your monthly payments.
Repaying your student loans
While you may be tempted to use a credit card to make your private student loan payments to earn rewards, it’s rarely worth it and could even be a bad idea. Cash advances have high-interest rates and fees, Plastiq charges a balance transfer fee for each transaction, and you’ll simply transfer student loan debt to your credit card balance. Also, even the best credit cards often have higher interest rates on an outstanding balance compared to your student loan interest rate.
Bottom line, explore your other repayment options. If you think refinancing your student loans sounds like a good strategy for you, you can get a rate estimate in as little as two minutes without impacting your credit score.