6 Ways Paying Student Loans with a Credit Card

6 Ways Paying Student Loans with a Credit Card

Paying student loans with a credit card: research by student loan company Sallie Mae shows that in 2010, about 5 percent of college students paid an average of more than $2,000 in tuition and other educational expenses with a credit card to avoid student loans. The same study showed that 6 percent of parents used credit cards to pay an average of nearly $5,000 in college tuition for their children.

Is using credit cards a smart way to avoid student loan debt? Financial advisors almost agree the answer is no, but that's not stopping thousands of families from using credit cards in place of parental and student loans. Some families may think that all debts are the same; others may think they are not eligible for a student loan.

What exactly do student loans offer compared to credit cards?

1. Availability

Particularly in recent years, as credit card companies have tightened their credit requirements as they move away from the easy lending that led to the foreclosure crisis, credit cards have become more difficult to qualify for as they are mostly available to consumers with good credit ratings. For many consumers with poorer credit ratings, the credit lines have been reduced or eliminated altogether.

Federal College loans, on the other hand, are available with little or no credit requirements. Government-sponsored Perkins Loans and Stafford Loans are granted to students on their own behalf without a credit check and without the need for income, employment, or security.

Federal loans for parents, known as PLUS loans, are not subject to any income requirements and only require that you do not have significant negative credit factors: a recent bankruptcy or foreclosure, delinquent federal education loans, and arrears of 90 days or more. In other words, don't pick up credit cards just because you don't think you're eligible for a debt loan. Today, you're more likely to qualify for a federal college loan than a credit card.

2. Fixed Interest Rates

While most credit cards have variable interest rates, federal parental and student loans are fixed-rate loans. With a fixed interest rate, you can be sure that your student loan interest and monthly payments will not increase, even if general interest rates do. Many credit cards also penalize you for late or missed payments by increasing your interest rate. For government debt loans, the interest rate remains the same regardless of your payment history.

3. Deferred Repayment

Federal student loans and federal parental loans may be deferred for up to six months after leaving school (nine months for Perkins College student loans). With credit cards, however, the bill is immediately due, and the interest rate on a credit card balance is generally much higher than the interest rate on federal debt. If you are in financial distress, federal loans also offer additional deferral and forbearance options that allow you to defer payments until you recover. Even most private student loans (non-government educational loans offered by banks, credit unions, and other private lenders) give you the option to defer payments until after graduation.

Note, however, that even if your payments are deferred, interest will continue to accrue on these private student loans, as well as federal parental loans and unsubsidized federal student loans. If the prospect makes you nervous about forbearing student loan debt that is slowly growing due to the interest arrears, talk to your lender about school prepayment options that could allow you to earn at least the interest on your debt each month to pay to balance your balance. Don't do math while you're at school.

4. Payment Options Dependent on Income

Once you start paying off your student loans, federal loans offer expanded, income-related repayment options.'s advanced payment plans give you more time to pay, reducing the amount you have to pay each month. An income-related repayment plan lowers your monthly payments to a certain allowable percentage of your income, so your student loan payments don't eat up more of your budget than you can live on. Credit cards don't offer that kind of payment flexibility, regardless of your employment, income, or financial situation. Your credit scorecard calls for a minimal month-to-month payment. If you can't afford them, your credit card company may initiate collections to try to recover the money you owe.

5. Tax Benefits

Any interest you pay on your parent or student loan debt may be tax-deductible. (You must file a 1040A or 1040 instead of a 1040EZ to get the student loan interest deduction.) In contrast, interest on credit card purchases cannot be deducted, even if a credit card is used for deductible educational expenses. To determine if you are eligible for tax benefits on your college loans, consult a tax professional or see IRS Publication 970, Education Tax Benefits, available on the IRS website.

6. Student Loan Forgiveness Programs

While the only way to get out of your current credit card debt is to pay it off in bankruptcy, there are several loan forgiveness programs that provide eligible borrowers with partial or full student loan debt relief. Typically, these loan forgiveness programs pay off some or all of your undergraduate and graduate student loan debt in exchange for your committing to work for a specified number of years in a high-demand or underserved field.

The federal government sponsors the Public Loan Forgiveness Program, which forgives you any remaining federal debt on educational loans you owe after 10 years of public service. Other federal, state, and private loan forgiveness programs serve to repay state and private student loans for a variety of professionals, including veterinarians, nurses, rural physicians, and prosecutors. Professionals, including.