Move Student Debt to Credit Card?

May 14, 2013 by

The following is a guest post from Gary Dek. Gary is a writer for Gajizmo.com and is always looking for ways to make and invest money. Gary previously worked for an Internet company on their M&A team, as well as investment banking and private equity firms in California.

Indebted college graduatesHow To Pay Off Your Student Loans With Low Interest Credit Cards

While secondary education is necessary for those who want to find good jobs, the expense of tuition, room and board is high. Most students need to rely on student loans to cover the cost of their education. According to CNN, students who graduated from college in 2012 had an average debt of $25,250, while the median student debt was closer to $15,000. This means that while some graduates may have had lower debt, many had even higher debt, as much as $100,000, skewing the average higher.

In most cases, you shouldn’t allow money to get in the way of your education. If your career of choice is only possible with an undergraduate or graduate degree, it may be better to charge small amounts of your tuition onto your credit card rather than drop out of school. On the other hand, student loans cannot be discharged through bankruptcy and the lenders can garnish wages and confiscate tax refunds to satisfy the obligation. If you’ve already incurred student loans, the best solution is to pay off the debt as quickly as possible.

While conventional wisdom would be against using credit cards and we would never advocate carrying any type of balance on one because of the near usurious rates, in certain situations, it might just be your only option. With enough readers on personal finance blogs explaining that they’ve had to use credit cards to pay off their student loans, I thought it might be constructive to offer tips on how this can be done somewhat responsibly.

Low Interest Balance Transfer

If you have a good credit score, you may be eligible for credit cards that have introductory offers of 0% APR on balance transfers. The 0% APR is usually available between 6 and 18 months and during this period, you can pay more on the principal of the loan since there are no interest charges. However, there is usually a 3% transaction fee on balance transfers and you will probably not be able to transfer the full amount of your student loans to a credit card.

You can establish a good credit rating while you are still in school by using a credit card and charging a minimal amount each month. Pay off the entire bill at the end of the month and you will not have to pay interest charges while establishing a good to excellent credit score. If you cannot qualify for a regular credit card right away, consider applying for a secured credit card. Make sure the credit company makes regular reports to major credit bureaus.

Prioritize Loan Payments

The first loans to pay off are those with the highest interest rates, which will save a considerable amount of money over time. Government guaranteed student loans often offer perks that you should not discount in a rush to pay off loans. Many of these student loans offer forgiveness for part or all of the loan if the student works in the public sector like public schools or works for aid programs like the Peace Corps. If your federal student loan offers forgiveness, you may save money by making the payments over time. As a rule, federal student loans have lower interest rates than private loans, so prioritize higher interest rate debt.

How Much to Transfer

When using credit cards to pay student loans it is important to only transfer an amount that you can pay off within the introductory period. Consider your income and monthly living expenses and decide how much you can pay on the loan each month, then multiply that amount by the number of months in the introductory offer. If you do not pay off the full amount of the loan within the introductory period, you could end up paying higher interest on the credit card balance than you would have paid on the loan originally.

Evaluating Transfer Offers

As we mentioned, most credit card companies charge a transaction fee of 3% for balance transfers. On a 12 month 0% APR introductory offer, this is equal to paying 3% interest for one year – a rate you will likely find on a mortgage loan, not a student or personal loan. There are introductory offers for 3% APR on transferred balances for up to 60 months, so if you are considering transferring high interest student loans to a credit card, it pays to shop around for the best offers. Some companies do not charge a transaction fee but have a 2% or 3% interest rate on transferred balances. You may even be able to transfer your balance multiple times, from one credit card company to another that is offering the 0% APR offer.

If you are a student just starting out, even if you have a good credit score, it is unlikely that you will receive enough credit card approvals to transfer the full amount of student loans to credit cards. Start with high interest loans for smaller amounts and pay these off. Your credit rating will improve as you pay down the debt and this will make you eligible for even better interest rates and offers from credit card companies.

Risks of Low APR Credit Card Balance Transfers

Unlike loans, there is no grace period for late payments on credit cards and they may charge penalties of up to $35 for late or missed payments. Credit card companies may choose to raise interest rates on the entire balance to the default interest rate of up to 29.99% if payments are missed or paid late regularly.

Introductory offers have a temporary interest rate that expires at the end of the introductory period and interest on most credit cards is between 10.99% and 29.99%, which is considerably higher than even the highest interest rates on student loans. If you are not certain you can pay off the balance within the introductory period, do not transfer loan balances to credit cards. You will end up paying 2 to 5 more in interest payments because of this mistake.

If you are confident that you can pay off the balance within the introductory period, make sure to read the fine print and be aware of any penalties that can be charged for late or missed payments. Check to see if a late or missed payment will result in the loan reverting to the default interest rate. Additionally, if you plan on repeating this process again and transferring your debt to another credit card company, make sure the fine print allows you to do so without locking you for a fixed period of time.

This approach to debt reduction requires discipline and dedication to eliminating the outstanding loans. Only consider high interest student loans for balance transfers. If your federal student loan is eligible for forgiveness or has other perks like grace periods, it may be better to continue paying the loan. Variable interest rate loans may have lower rates than credit cards, but it pays to watch the rates on these since the interest rate could increase.

Final Word

Although using credit cards to pay off student loans does have its risks, it may be your only way to reduce interest and pay off loans faster. It is important to pay off any extra charges plus make the payment on the loan balance every month to avoid creating even more debt. Individuals who lack financial discipline should probably not use this particular approach, especially if they are tempted to charge unnecessary purchases on the card.

Kurt’s comment: I’d like to emphasize that, as I read Gary’s article, he’s not recommending using credit cards to finance education. Rather Gary is outlining best practices for transferring student loan debt to a credit card in situations where that makes sense by saving interest expense and speeding student debt retirement. I especially appreciate has strong cautions before transferring any student debt to a credit card about paying attention to details, reading the fine print, and taking measures to assure you don’t get burned by high credit card interest rates after a transfer.

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