Money Girl explains whether transferring student loan debt to credit cards is a smart move for your personal finances.
Using No-Interest Credit Cards to Pay Off Student Loan Debt
Now that you understand the basics of balance transfer credit card offers, let’s talk about using them specifically for student loan debt, which is what Sandy asked about.
Because qualified student loans have special benefits, here are 3 major drawbacks to consider when using no-interest credit cards to pay them off:
1. You give up tax benefits. For 2013, you may be eligible to deduct up to $2,500 in interest for federal or private student loans, even if you don’t itemize deductions on your tax return. This saves money by reducing the amount of tax you have to pay, or increasing your tax refund.
Because qualified student loans have special benefits, there are major drawbacks to consider when using no-interest credit cards to pay them off.
However, credit card interest is never tax deductible. So you never get to claim a student loan interest tax deduction when debt is transferred to a card. Take a look at IRS Publication 970, Tax Benefits for Education, for more information.
2. You give up repayment options. Most federal student loans come with a variety of repayment alternatives to help you manage your finances if you get into trouble. For instance, income-based repayment plans allow you to reduce monthly payments to a small percentage of your current income. Or you may be able to defer payments altogether for a period of time. (These options are typically not available, however, for private student loans.)
Credit card companies, on the other hand, are much less forgiving when you have a hardship. Getting behind on credit card payments will cause your credit score to take a nose dive.
3. You give up forgiveness options. Working for the government, as a teacher in low-income communities, or in public service can make you eligible for forgiveness on federal student loans after working a certain number of years.
But once you transfer student loan debt to a credit card, those forgiveness options disappear.
Tips to Pay Off Student Loans Faster
If you decide to keep your student loans as-is, here are tips to pay them off faster:
Make larger or more frequent payments. While this might seem obvious, paying down your principal balance ahead of schedule means you’ll pay less interest and save money.
Ask about interest rate discounts. Depending on your situation, your lender may be able to cut your interest rate. Signing up for automatic electronic payments, having a history of on-time payments, or having an excellent credit score, may qualify you for a rate reduction.
Consider loan consolidation. If you have multiple student loans, ask your lenders about the pros and cons of consolidation. (You can’t combine federal and private loans, however.) It could be a smart move if it would significantly reduce the overall interest rate you have to pay - but not if it’s a wash or would leave you with fewer repayment options or benefits.
To sum up, a no-interest offer is a powerful financial tool. Doing a balance transfer, especially for student loans, is like using a chainsaw to clean up a fallen tree. You can get the job done, or you can really hurt yourself if you’re not careful. So be sure to do your homework first and consider all your financial options.
Get More Money Girl!
There’s a huge archive of past articles and podcasts if you type in what you want to learn about in the search bar at the top of the page. Here are all the many places you can connect with me, learn more about personal finance, and ask your money question:
- Money Girl podcast on iTunes (it’s free to subscribe!)
- Email: email@example.com
Download FREE chapters of Money Girl’s Smart Moves to Grow Rich
To learn about how to get out of debt, save money, and build wealth, get a copy of my book Money Girl’s Smart Moves to Grow Rich. It tells you what you need to know about money without bogging you down with what you don’t. It’s available at your favorite book store in print or as an e-book for your Kindle, Nook, iPad, PC, Mac, or smart phone. You can even download 2 free book chapters at SmartMovesToGrowRich.com!