Can You Pay Your Student Loan Bill with a Credit Card?

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The cost of higher education has ballooned exponentially in recent years. The days of being able to put yourself through a big university on a part-time or full-time job are mostly gone. Today, financial aid and student loans are almost as much a part of college as attending class.

As a result, many students graduate school with a significant amount of student loan debt; in fact, student loan debt is the second-leading form of debt in the United States with over $1.5 trillion outstanding.

The typical college graduate leaves school with an average student loan debt of nearly $28,000. On top of this, the numbers show that many graduate borrowers have a hard time making payments – over 11% of borrowers default on their loans.

If you’re having problems making your payments, you might find yourself looking for new solutions to meet your obligations. One idea that comes to mind is using your credit card to make your monthly payment. Can you do it? More importantly, is it a good idea? Let’s take a look.

Why & When Could You Need to Rely on a Credit Card?

Using a credit card to make student loan payments might seem like a great idea, especially if you don’t have the cash in your bank account to pay it. Unfortunately, you can’t simply call your servicer and give them your credit card. It’s not possible to make a direct payment with a credit card because they aren’t accepted.

However, there is an indirect way to use your credit card for a student loan payment. You are able to take out a cash advance on your card and use that to make a payment. There are two ways to do this.

ATM and Bank Cash Advances

The most obvious way to take out a cash advance is to visit an ATM with your credit card and withdraw cash. In order to do this, you’ll need a PIN for your account. In most cases, the issuing bank will send you a cash advance PIN on request if your card has cash advance capability – some low-limit or secured cards don’t have this feature.

You can also visit any bank and get a cash advance at the teller window. You’ll need your identification with you, and in some banks, you may need to be a customer. Regardless of which method you choose, any cash you take out as an advance should be deposited to your bank account. Now you can write a check for your payment or use your loan servicer’s online payment system to apply the funds to your loan account.

Cash Advance Checks

Credit card companies often send checks to their customers that work much like a regular check you might have on your bank account. Instead of drawing on funds from your account, however, they draw from your credit line as a cash advance. You can use these checks to make your student loan payment; the money will simply be viewed as a cash advance instead of a purchase.

Whichever option you choose; this is an actionable solution in times of need. If you only need to do this once or twice because of some unforeseen circumstances, a cash advance may be a valid way to keep your payment history on time.

What to Watch Out For

As easy a solution as this might seem, there are some not-so-great downsides to it as well.

Cash advances have much higher interest rates than regular purchases on a credit card. When you take out a cash advance, that balance is subject to a higher APR which is around 24.99 percent. In contrast, student loan interest rates are much lower.

By using a cash advance to make your student loan payment, you’re effectively transferring that balance from a lower to higher rate. Although your student loan payments won’t be late, you’ve essentially just put it off until later. Furthermore, it’ll cost more due to the cash advance APR.

In addition, that “new” credit card debt doesn’t have the same perks as student loans. Benefits like income-driven repayment plans, deferment or forbearance, and tax benefits are all given up if you move your student loan debt to a credit card.

You should also be aware of fees. Any transaction viewed as a cash advance will be charged a fee, usually a percentage of the advance amount. This will only increase the cost of making the payment.

Summing It Up

If you need to make a student loan payment but you simply don’t have the cash, there are still other alternatives to consider. For instance, deferment or forbearance would allow you to take up to 12 months off of making payments, to allow you to get back on your feet financially. The interest may still accrue depending on your situation which will be capitalized onto your balance.

It’s important to make your student loan payments, but not every option available to you is a smart choice. A cash advance could help you avoid missing payments & a hit on your credit score, but it may cost you more financially in the long term. You may want to consider other options first, especially for federal loans.
By Andrew, a Content Associate and Writer from LendEDU – a consumer education websites and marketplace.