Now more than ever, student loan debt preoccupies a relatively large chunk of a young college graduate’s monthly budget. If you’re working a job that pays too little, then you may be struggling to make student loan payments on top of basic living expenses.
If you are in this category and are stretched thin, you may wonder whether you can make a student loan payment with your credit card. Typically, a student loan payment comes directly out of your checking account, or you can mail a check to your student loan servicer. So, is a credit card payment to a student loan account even possible?
The easy, short answer is no. But it’s not actually that simple. While servicers don’t allow you to pay directly with your credit card, there are workarounds.
How to Use A Credit Card
Many credit cards allow you perform a cash advance. A cash advance is an ATM or over-the-counter transaction where you can withdraw cash. You are able to withdraw any amount of cash up to your credit limit, which may be enough to cover a few hundred dollars.
Taking this cash, you should be able to deposit it into your bank account and send a check to your student loan servicer.
As you can see, it’s possible to use a credit card. However, if you know anything about credit cards, it should also sound incredibly risky! Keep reading to figure out why. There are pros and cons to the solution; it’s important to understand both.
Are There Any Advantages?
There is only one major benefit of using a cash advance to pay a student loan. That benefit is being able to stay current on your payments. In other words, you won’t have to worry about a late fee from your student loan servicer. Furthermore, you can avoid any negative marks on your credit profile as a result.
If you are short on cash and can’t make your student loan payment, then maybe a credit card solution is worth considering. However, while there is one positive to this solution, there are various drawbacks that need to be kept in mind.
Disadvantages of Paying Student Loans with a Credit Card
As mentioned, there are a number of downsides to making a student loan payment with your credit card. These may dissuade you from trying the idea.
Credit cards have much higher interest rates compared to student loans. Standard credit card APR is about % according to USA Today which is already higher than most student loans today. It should be noted that you’ll be paying a higher APR on cash advances – typically 24%.
Paying interest on a cash advance will simply cost you more in the long run compared to a student loan. Federal student loan interest rates range from 5.05% to 7.6% offered by the government, and private student loan interest rates range roughly from as low as 5.07% to as high as % depending on the lender. It should be noted that private loan rates are typically much higher than federal loans, yet cash advance rates are even higher that private student loans.
There are more problems with cash advances. In addition to high APR, you will be charged a cash advance fee. This you can try these out fee may be as low as $5 or $10 flat rate fee. But it’s much more likely the fee will be a percentage (3% or 5%) of the cash advance amount. For instance, a $500 cash advance would incur a $25 fee with the 5% fee in play.
Needless to say, paying with a cash advance will cost you more. If you fail to pay back the cash advance on time (in addition to your continuing obligation to repay student loans), then you will be on the hook for great interest payments down the road. On top of it all, any malpractice or failure to make payments on the credit card will also negatively impact your credit.
You may apply for deferment or forbearance on federal student loans. These options allow you to suspend payments for a set period of time. If you can qualify for deferment, then you may not be responsible for interest accrual during that lull period. With forbearance, you would have to pay that interest. Both of these are ways to avoid entering default or delinquency.
If you have federal student loans and you’re trying to continue making payments, then you may be able to consolidate them with the government. With this, you combine all your loans into a single consolidation loan. You have the option to extend the repayment term, reducing the monthly payment. This will cost you more in interest over time, but it’s a viable way to alleviate the strain on your budget.
To recap, it’s generally not a good idea to take out a cash advance for a student loan payment. If it’s an emergency and you know that you’ll be able to eat the APR and fees later, then it may be a solution to stay current, albeit a risky one.
Author:
Andrew is a NYC-based writer with a knack for personal finance. He grew up reading the Wall Street Journal and watching Bloomberg and today enjoys helping Americans optimize their finances.