Smart Strategies for Managing Student Loans

Managing student loans can be a daunting task, especially when you’re trying to balance other financial responsibilities. While it might seem tempting to use a credit card to pay off your student loans, this approach can be risky and expensive. In this blog, we’ll explore why using a credit card for student loan payments is generally not advisable and discuss alternative strategies that can help you manage your student loans more effectively.

Why You Shouldn’t Pay Your Student Loans With a Credit Card

Federal student loan servicers and most private student loan providers do not accept credit cards as a payment method. While it is possible to use third-party payment providers, balance transfers, or cash advances to pay student loans with a credit card, these options come with significant drawbacks.

Added Fees and Interest

Using a third-party service like Plastiq to pay your student loans with a credit card will incur additional fees. Plastiq, for example, charges a 2.9% base fee and a $0.99 delivery fee per transaction. These fees can quickly add up, increasing the overall cost of your loan. Additionally, not all credit card issuers allow this option.

Balance transfers might seem like a good idea if you can take advantage of a 0% APR introductory offer. However, you’ll need a good credit score to qualify, and you’ll typically pay a balance transfer fee of 3% to 5% of the transferred amount. If you can’t pay off the balance before the promotional period ends, you’ll face high-interest rates.

Cash advances are another option, but they come with high fees and interest rates that can reach 29.99% or higher. This should be considered a last resort due to the high costs involved.

Impact on Your Credit Score

Paying student loans with a credit card can negatively affect your credit score. Increasing your credit card balance raises your credit utilization rate, which is the total revolving credit you’re using divided by your total credit limit. Credit utilization is a significant factor in your credit score, and experts recommend keeping it below 30%.

Loss of Loan Protections

Transferring a student loan balance to a credit card means losing any consumer-friendly student loan repayment options you previously had, such as forbearance and forgiveness. For example, federal student loans come with benefits like payment pauses during emergencies, which you would lose if you transferred the balance to a credit card.

Alternative Ways to Pay Off Your Student Loans Without a Credit Card

There are better alternatives to paying off student loans with a credit card. The best option for you depends on your financial situation and goals.

Refinancing

If you have good or excellent credit, you may qualify to refinance your student loans to a lower interest rate. Refinancing can provide more time to pay off your loans at a lower rate without the fees associated with balance transfers. However, refinancing federal loans into private loans means losing access to federal loan benefits.

Income-Driven Repayment

For federal student loan borrowers struggling to afford their payments, income-driven repayment plans can be a lifesaver. These plans limit your monthly payments to a percentage of your discretionary income and offer loan forgiveness after a certain number of years. Starting in July 2024, the new SAVE plan will reduce monthly payments to 5% of discretionary income and shorten the timeline for forgiveness to 10 years for many borrowers.

Deferment or Forbearance

Both federal and private student loans offer options for pausing payments temporarily. If you’re facing short-term financial hardship, you can apply for deferment or forbearance to get a break from student loan bills.

Consolidation

Federal student loan consolidation can replace multiple loans with a single new loan, extending your repayment term or making certain types of loans eligible for income-driven repayment. This can result in a smaller monthly payment while maintaining access to federal loan benefits.

The Bottom Line

Paying student loans with a credit card is generally not advisable due to the high fees, interest rates, and potential negative impact on your credit score. Instead, consider other strategies to manage your student loans, such as income-driven repayment plans, refinancing, deferment, forbearance, or consolidation.

If you’re looking for expert advice on managing your student loans or exploring refinancing options, O1ne Mortgage is here to help. Contact us at 213-732-3074 for personalized mortgage services and let us guide you towards a financially secure future.

Remember, managing your student loans effectively can pave the way for a brighter financial future. Don’t hesitate to reach out to O1ne Mortgage for all your mortgage service needs.