Paying Student Debt with Balance Transfer Cards a Good Idea? A Reddit Study
Tackling Student Debt with Balance Transfer Cards
Walking the sloped length of my drive with a handful of mail is an evening ritual – one that I share with millions of Americans and billions of people worldwide. Generally, by the time I reach my front door, I’ve sorted this jumble of envelops and fliers into two piles. The one with hand-written addresses and appropriate abbreviations of my name goes on my desk, and the one with window envelopes and gaudy printing gets unceremoniously dropped into recycling. This week, however, one of my ‘junk mail’ offers, a 0% APR Credit Card Promotion, caught my eye – and gave rise to the article you are about to read.
Recently, the rising cost of student loan debt has been in the news, all over Reddit, and on my mind. On a national level, the 40-odd million residents who are encumbered by student loan debt constitute a systemic financial crisis – one that tugs down the entire economy. Even as a casual consumer of Reddit financial posts, I have seen evidence of systemic financial panic related to student loan debt. College graduates who are upside down on loans and hopelessly underearning reach out to strangers for financial advice and comfort.
Traditionally, credit cards and credit card debt have a somewhat sinister reputation. Conventional wisdom would suggest that transferring student loan debt to credit card debt qualifies for an ‘out of the frying pan’ sort of move.While there are reasons to pause before applying willy-nilly for new credit cards (and we will explore those), there are also incredible benefits to paying down student loans by transferring debt to a credit card. In this article we will explore:
- The Pros and Cons of Transferring Student Debt to a Credit Card
- The Best Methods for Transferring Student Debt to a Credit Card
- Continuing Considerations after Transferring Student Debt to a Credit Card
Should you Transfer your Student Loan Debt to a Credit Card?
In the broadest terms, what we are talking about is pretty simple:
Step 1: Pay off student loans by transferring that debt to a credit card which offers you a promotional period with no interest.
Step 2: Pay off that credit card debt (or most of it) before the promotional period expires.
The reality, however, is more complicated and potentially confusing. Before defining strategies for transferring student loan debt to a promotional credit card, let’s delve into various factors which inform this process. First, we need to confirm that it is possible for you to execute this move. Then we must examine whether it is the most prudent financial decision for you.
Personal Factors: Financial
Before considering external factors such as your current loan and potential credit card offers, let’s take a thorough inventory of what you bring to the table – starting with your current financials.
Starting from the top down, let’s look at income first. Many people in debt focus only on reducing the amount of debt or lowering interest rates. While these are critical factors, the amount of money you bring in is arguably more important. Consider the old business maxim ‘Sales Curse All Ills’ and think of your income as these ‘top-line sales’. The higher your income, the more likely it is that a balance transfer is the right financial decision for you.
Of course, we all have expenses. Rent, dependents and other debts can quickly sap your income each month. Only the income that you have remaining to pay off debts should be considered in your calculations.
Maximum Monthly Payment
One of the most important budgeting calculations you can make is to determine the maximum monthly amount you can afford to pay toward your debt. Generally speaking, the higher your monthly payment, the more quickly you pay your down and the less overall interest you accrue. This is especially critical when considering a transfer of your debt from student loans to a credit card.
Your credit score both affects and is affected by your decision to transfer your debt to a 0% APR credit card.
The higher your credit score, the more likely you are to qualify for advantageous credit card offers, lower interest rates and longer 0% APR promotional periods. Better credit will also encourage credit card companies to give you a larger line of credit, which will allow you to transfer more of your outstanding student loan balance.
If you decide to transfer your balance, your credit score will likely decrease in the period following the move. This is because credit card debt is a negative credit factor, especially if it increases your percentage of utilized revolving debt compared to your total available credit.
Finally, applying for the credit card itself will likely decrease your credit. Applying for any new debt (credit cards, loans, mortgages) results in ‘Hard Inquiries’ into your personal credit, which lower your score. For this reason, it’s advisable to only apply for credit cards for which you have good approval odds. Just because a credit card offer states that you are ‘Pre-Approved’ does not mean that your application will be accepted. You can use sites and apps like Credit Karma to help you evaluate your approval odds. Also, if you apply for a credit card with a financial institution with which you already have a relationship (e.g. a checking account), they should honestly advise you in this area.
Personal Factors: Mental/Emotional
I know this sounds funny, but financial factors aren’t the only personal factors you should consider when evaluating important financial decisions such as a major balance transfer. Your financial situation greatly affects your mental and emotional health, which, in turn, affects your daily quality of life. I would strongly advise you to honestly evaluate how these factors weigh in.
Put bluntly, moving your debt from a federal or private student loan to a credit card balance raises your financial risk. If you still have credit card debt at the end of your promotional period, this may accrue interest at a higher rate and place you in a more tenuous financial situation than before. If you are uncomfortable with a higher-risk financial situation (perhaps you don’t enjoy investing in stocks), a balance transfer may be less appealing to you.
The success of a balance transfer to a 0% APR credit card relies on the ability to quickly pay down the outstanding balance. This often requires a period of personal sacrifice in order to divert the maximum amount of assets to the monthly payments. If you are not comfortable sacrificing some creature comforts during this critical period, a balance transfer may not be right for you.
When you successfully transfer your debt to a credit card, you will likely still have some unused balance on that card. In order for this plan to be successful, you must avoid the temptation to spend this newly acquired credit. If you use your new card to rack up additional expenses, your chances of successfully paying down the balance before the end of the 0% APR period will rapidly diminish.
Any sort of debt is stressful. Arguably the sustained nature of prolonged student loan debt may take a steeper toll on your psyche. That said, a big financial move like transferring your student debt to a credit card is sure to spike your stress levels. Make sure you have the sort of temperament that can handle the strain or research some mechanisms (e.g. meditation) for riding out the emotional strain.
Current Student Loan Factors
Now that you’ve taken a good, hard look at the personal factors that play into your decision, consider the factors that your current student loan brings to the table.
Of course, the first thing you want to consider is how much you owe. The higher the total amount of debt, the less likely you are to qualify for a credit card to cover the majority of it. If you only transfer a small amount of the total debt, you will only saddle yourself with multiple monthly payments, which may make your financial situation worse.
Consider the structure of your current debt and how that compares to the situation you would be moving into with credit card debt. For instance, some student loans are structured using ‘Income-Driven Repayment’ plans. Examples of these loans are a ‘Pay As You Earn Repayment Plan’ (PAYE), an ‘Income-Based Repayment Plan’ (IBR) and an ‘Income-Contingent Repayment Plan’ (ICR). If you have a low income (or high expenses), these sort of plans can greatly benefit you. Credit card companies do not take into account your earnings when calculating your minimum monthly payment.
Current Interest Rate and Monthly Payment
Even if you do not currently have an Income-Driven-Repayment Plan, you may have a low interest rate and a manageable monthly payment. Consider the effect of exchanging these for a payment that will allow you to substantially reduce your debt during a credit card’s promotional period. One final consideration here: Interest paid on student loan debt is tax deductible up to $2,500. Credit card interest payments are not.
Length of Time Needed to Pay off the Student Loan
A manageable monthly payment is only part of the consideration. Consider the length of time it will take you to pay off your entire student loan at your current monthly payment rate. Some people have student loan debt that they will not pay down for decades with their current earnings. Many people would prefer to pay a higher monthly rate if it would mean cutting years off their period of indebtedness. A transfer to a 0% APR credit card is a good way to accomplish this.
Potential Credit Card Factors
As a final investigation prior to applying for your balance transfer credit card, you should consider all of the information provided you by the credit card company itself.
Length of 0% APR Period
The success of the credit card balance transfer strategy relies on paying down the maximum amount of debt during the 0% promotional period. The most important factor when considering potential credit cards is the length of the promotional period.
Conditions of the 0% APR Period
Carefully read the conditions of the promotional offer and the repercussions of breaching any of these conditions. Although the interest accrual during the promotion will be 0%, the credit card will still set minimum monthly payments. Often, if you make a late or insufficient payments, the promotion is immediately canceled and a penalty rate APR is applied. Also, many times the 0% APR applies only to the initially transferred amount. Additional purchases made on the credit card will accrue interest at the normal rate, even during the promotional period.
Interest Rate After the 0% APR Period
Even if you plan to pay off all of your debt during the promotional period, it’s critical to consider the interest percentage after the promotion. Many times, people’s financial reality does not match their ambitions. Plan for the worst and make sure you can afford to take on the higher interest rate for whatever balance you have remaining.
Conditions of the Balance Transfer
Credit cards do not all have the same policies for balance transfers. Most importantly, many credit cards charge a balance transfer fee. At a typical balance transfer rate of 3%, a $10,000 balance transfer will cost you $300 off the top. Look for promotions that waive the balance transfer fee.
Credit Card User Ratings
Not all credit cards are created equal. Some come from much more reputable institutions than others. Use credit card review sites to compare details and user ratings for the cards you are considering. Compare things like the difference between the appealing intro interest rate and the standard or penalty interest rates. Less scrupulous lenders use enticing intro rates that are easily voided by minor infractions, resulting in extremely steep financial penalties. You can also glean useful information about the responsiveness of the lender’s customer service and their willingness to help you actively improve your financial situation after you enroll.
Evaluating Transferring Student Debt to a Credit Card
While these are only a handful of the considerations we have covered in this article, this table will help you with a snapshot of considerations to weigh when making this financial decision.
|0% intro APR saves money in interest payments||Credit cards have minimum credit requirements (usually 700) for 0% APR promos||Balance transfers may cost 3% of the transferred amount|
|Rewards cards give you points and/or cash back||Credit cards may charge a much higher interest rate after the promo period ends||Interest paid on a credit card is not tax deductible (like student loan interest)|
|Credit card debt can be discharged through bankruptcy||Missed/late payments may result in cancellation of the promo||Credit card debt does not have certain student loan benefits (e.g. income-driven repayment plans)|
A Theoretical Math Problem
To help us wrap our noodles around these considerations, let’s plug in some numbers for two very similar theoretical people: one who would benefit from a balance transfer and one who would not.
|Student Loan Debt: $25,000||Student Loan Debt: $25,000|
|Current Income: $45,000||Current Income: $30,000|
|Maximum Monthly Payment: $1,500||Maximum Monthly Payment: $1,000|
|Promo Period of Credit Card: 16 Months||Promo Period of Credit Card: 12 Months|
|Credit Card APR after Promo: 17.24%||Credit Card APR after Promo: 17.24%|
|Balance Remaining after Promo Period: $1,000||Balance Remaining after Promo Period: $13,000|
While both people have the same amount of debt, Sabrina has a higher income, allowing her to make a higher monthly payment. She has also qualified for a longer 0% APR promo period.
Due to these differences, at the end of the promo, she is left with only $1,000 of her original $25,000 debt . On the other hand, Dave is still $13,000 in debt, which will then accrue interest at 17.25%. While Sabrina would benefit greatly from a well-managed balance transfer, Dave should consider other options.
How to Transfer Your Student Loan Debt to a Credit Card
So, you’ve decided to tackle your student loan debt with a balance transfer to a credit card that offers a 0% APR promotion. While the content of the preceding paragraphs is a good start, let’s walk through the process in some more detail. First things first: pick the credit card you will apply for.
Pick the Right Credit Card
Credit Cards you will be Approved For
As you won’t have a balance transfer without being approved for a card, this is your most important consideration when comparing different credit cards.
Credit Cards with Longer 0% APR Promotional Periods
As I mentioned earlier, this is a critical factor too. Consider the difference between 12 and 16 months during a 0% APR promo period. If you’re paying off your balance at the rate of $1,250/mo, those four months would give you the opportunity to pay down an additional $5,000 at 0% interest. On the other hand, that $5,000 would cost you almost $300 in interest over the same four month period at a rate of 17.24%
Credit Cards that Allow Balance Transfers from Student Loans
Once you pick a short list of credit cards, check with each of them to see if they allow balance transfers directly from student loans. If they don’t you should be able to write yourself a check from your line of credit and then pay down your student loan from your checking account balance. Again, it’s important to ask all of these questions before you apply for the card.
Credit Cards with No Transfer or Annual Fees
If you can find cards that you will be approved for that waive these fees, it can save you a substantial amount of money. Of course, you should also weigh these benefits against other factors such as the % APR after the promotion ends. If the card waives the annual fee but charges you a higher rate of interest, it could cost you more money. This will depend on how quickly you can pay down your balance.
Credit Cards with Cash Back or Rewards
While not the primary concern for a balance transfer card, it’s always nice to earn cash back and other rewards. However, many of these rewards will only kick in if you make additional purchases after your balance transfer. Be careful not to let additional spending sideswipe your debt-reduction plan.
Coordinate between the Credit Card and the Loan Provider
After you’ve applied for and been approved for the credit card, you need to coordinate between the credit card company and the student loan provider to transfer your debt. There are typically two paths you can take here.
Option 1: The Credit Card Writes the Loan Provider a Check
You should ask your credit card company if they will directly send your loan provider a check. If they will, contact your loan provider and make sure they will accept payment in this way. If both agree, coordinate the payment. This will pay your loan down (or off) and immediately add this amount to your credit card balance.
Option 2: The Credit Card Writes You a Check
If the credit card company will not write the loan provider a check directly, you can request a balance transfer check and write it to yourself, adding the money to your checking account and the debt to your credit card. From there, you can write the student loan provider a personal check.
Pay Off the Student Loan Quickly
After you are approved for the credit card balance transfer, please do not be distracted by the new funds you have access to. Use this money to pay off your student loan as quickly as possible.
Pay Off the Credit Card Diligently
Once the loan is taken care off, concentrate all of your efforts on paying down your credit card debt, especially during the 0% APR period. During this period you need to live as lean as you can and focus all of your finances on getting your credit card balance as low as possible.
Continuing Considerations as You Pay Down Your Debt
For most people, the decision to transfer all or a portion of student loan debt to a credit card is only the first (albeit crucial) step on their journey to a debt-free existence. If you’ve taken this plunge, here are some other ongoing considerations to keep near the top of your mind.
Set a Monthly Target & Prioritize Your Payments
While I can’t tell you how to spend your money, I can tell you that freedom from debt comes at the expense of creature comforts. Make your target monthly payment as important as your rent payment and your health insurance premiums. Cut out the Netflix and Starbucks if you have to. Trust me. You’ll adjust.
Missed or Late Payments
Whether by oversight or because you just didn’t have the funds, if you miss or short a payment, contact your credit card company immediately. Many lenders have penalty forgiveness for first offenders, but you have to make an effort to get it. If your request is initially denied, try taking it up the ladder. Someone, somewhere can approve the reinstatement of your promotional rates.
Unlike student loan payments, credit card debt can be discharged through bankruptcy. If you ever find yourself completely mired in credit card debt, this is an option. However, do not enter into this strategy with bankruptcy as your goal. This is a last-ditch recourse with extremely damaging financial repercussions.
I knew I forgot something. If you have student loan debt, that means that you pursued some form of higher education and that’s an amazing thing. Whether you’re currently a lawyer, a hospital resident or an out-of-work actor, my hat is off to you. An increasingly educated population bolsters our society and economy in myriad ways, even if the resulting debt does not.
One final thought. Debt reduction is not an all-or-nothing process. In two years, if you still have half the debt you do currently, you will have much more financial flexibility and an improved state of mind. Take it from a guy who has worked over $30,000 in debt down to less than $8,000, the combination of research and diligence can go a long way toward financial freedom. If you’ve hung in there through this article, you already have the tenacity, and I hope now you’ve picked up a few useful tips.
August 4, 2019
Mark Gibson is a personal finance consultant and wealth-investor. Mark brings his top-notch financial analysis to his work at FiGuides as our lead consumer finance editor.