Overwhelming student loan debt is a serious financial drag for tens of millions of recent and not-so-recent college and professional school graduates. According to data compiled by EducationData.org, approximately 45 million student borrowers carried an average debt load of $37,584 in 2020.
Private university graduates generally have more debt, but public school grads aren’t immune. They carry an average debt load of $30,030, according to EducationData. The total U.S. student debt balance reached $1.68 trillion in 2020 and grew six times faster than the broader economy.
With tuition rising inexorably and fallout mushrooming from a far-reaching pay-to-play scandal at elite four-year institutions, it’s no wonder many would-be students are rethinking the value of a college education. But those who’ve already graduated or dropped out of college or professional school don’t have that luxury. They’re stuck with the bill. And they’re desperate to keep their heads above water.
For many borrowers, keeping pace with student debt demands an “all of the above” strategy more sophisticated than simply setting an automatic monthly payment and praying that no unexpected financial hardships emerge during the decade or two that’ll elapse before the final monthly payment or loan forgiveness date finally arrives.
One little-discussed component of this “all of the above” strategy is appropriate for millions of private student loan borrowers with good credit: a low-interest credit card balance transfer. Although credit limits and cash flow realities might prevent a borrower with average income — or even above-average income — and an average student debt balance of, say, $35,000 from paying off their entire student loan balance during a single 12- to 24-month low-interest balance transfer period, this strategy can meaningfully reduce student debt balances and cumulative interest obligations. Repeated often enough, it can be a decisive factor in achieving student debt freedom ahead of schedule.
This strategy — a form of student loan refinancing — is not without risks. Some are obvious, like failing to pay off the transferred balance before the low-interest period expires and getting saddled with a regular credit card interest rate several times higher than the original loan’s. Others aren’t as well-known, like a significant increase in credit utilization that harms the borrower’s future chances of credit approval.
Using Low-Interest Credit Cards to Reduce Student Loan Debt: Planning & Process
A credit card balance transfer is not to be taken lightly. Before applying to transfer a portion of your student debt balance to a new or existing credit card, consider whether this strategy is right for you. If you decide that it is, you’ll then want to understand how to manage the refinancing process, avoid paying more than you should — use the balance transfer function responsibly — and choose the best balance transfer card for the job.
1. Determine Whether You’re a Good Candidate for a Credit Card Balance Transfer
First, you need to determine whether you’re a good candidate for a credit card balance transfer in the first place. If you’re not a good candidate, put off your application for a few months and focus on improving your position.
The most important consideration here is your credit score. Most low or 0% APR balance transfer promotions are reserved for applicants with good or excellent credit. Approval standards vary by credit card company and card, but in general, the odds of approval dwindle the farther your FICO credit score drops below 700.
Check your credit report to find out where you stand. If your score isn’t where you’d like it to be, focus on improving the components that need the most work. Unfortunately, this often requires time, as the most important credit score factors — payment history and credit utilization — can take months to change meaningfully through timely payments and paying down existing credit accounts, respectively.
One credit score factor demands special attention in this context: credit utilization, the ratio between your open credit balances (the numerator) and total available credit (the denominator). “Normal” credit card balance transfers, wherein the transfer occurs between two credit card accounts, don’t adversely impact borrowers’ credit utilization. This is because they don’t add to the numerator — the balance already exists on another credit card. But student loan balances don’t count as utilized credit for credit scoring purposes, so transferring a student loan balance to a new credit card can and often does adversely impact credit utilization.
That impact can manifest in a temporary hit to your credit score and a corresponding decrease in your likelihood of qualifying for new credit. This could be a problem if you plan to apply for new credit in the near future — if, say, your motivation for accelerating your student loan payoff is to clear the financial decks for the purchase of a new car or a home mortgage.
2. Eliminate Federal Student Loans From Balance Transfer Consideration
Don’t even think about transferring your federal student loans. Reserve this strategy for private student loans only.
Why? Because federal student loans come with a host of borrower-friendly benefits, including multiple options for adjusting or deferring payments in cases of financial hardship — known variously as deferment, forbearance, and modified repayment plan, among other terms. Their borrowers are also automatically eligible for federal student relief programs, such as the temporary suspension of student loan payments during the coronavirus pandemic. And student loans backed by the federal government have built-in forgiveness schedules — as little as 10 years of qualifying payments for borrowers with eligible public service jobs and 20 years for most other borrowers.
These benefits aren’t mere abstractions. In cases of serious financial hardship, they can mean the difference between muddling through and having to make gut-wrenching choices to stay solvent. And they’re only available to federal borrowers who haven’t consolidated or transferred their loans. Once you make that balance transfer, you’re stuck with a much less flexible credit product.
3. Prioritize Loans With Higher Interest Rates
Paying off higher-interest balances first is a reliable strategy to reduce the cumulative (lifetime) cost of your student loans. It’s also likely to accelerate your payoff by allocating more of each payment to principal rather than interest. And it makes it easier to find a transfer card with a lower interest rate, or at least one low enough to make the transfer worth your while.
The ideal transfer candidate is the highest-interest balance that’s small enough to transfer in its entirety — that is, one that’s smaller than your balance transfer card’s approved credit line. But you won’t know for sure how much you can transfer until your application is approved.
4. Confirm That Your Loan Servicer Allows Balance Transfer Payments — And How It Wants to Be Paid
Before going through the trouble of applying for a balance transfer credit card, make sure your student loan servicer allows lump-sum payoffs via credit card balance transfer. There’s no reason to expect that this won’t be the case — loan servicers want to get paid at the end of the day — but there’s also no point in leaving yourself open to an unpleasant surprise.
Repeat this process with the issuer of the cards you plan to apply for as well. Most major issuers allow student loan balance transfers, but the stakes are high enough that it’s worth a phone call to confirm.
You’ll also want to find out how your loan servicer prefers to be paid and how your issuer wants to make the transfer if the process is any different from a typical card-to-card transfer. You’ll want to make sure the two are compatible. For example, the card issuer might prefer to execute the transfer by paying the student loan servicer directly despite the servicer’s policy of only accepting payment from the borrower, in which case you might need to persuade the issuer to cut you a check for the transfer amount.
This shouldn’t be an insurmountable obstacle — again, servicers just want to get paid — but it might require more work on your end. And, if the issuer does end up cutting you a check, make sure it’s counted as a balance transfer rather than a cash advance, which isn’t likely to be included in a low or 0% APR promotion and may have higher fees to boot.
5. Decide How Much to Transfer
The golden rule of credit card balance transfers is “don’t transfer more than you can pay off within the promotional period.” It’s better to make multiple small student loan balance transfers than a single massive transfer that ends up costing you far more than the original loans.
The ideal student loan to transfer to a low or no-interest credit card is a low-balance, high-interest loan that can be transferred in its entirety — meaning it’s smaller than your card’s approved credit line. Assuming you pay the full balance within the promotional period, this has four advantages:
- You’ll pay off an entire loan without paying another dime in interest toward it.
- You’ll score a morale-boosting “win” by eliminating an entire loan from your ledger and making the remainder of your student loan balances seem that much more manageable.
- You’ll have more cash to devote to your remaining student loans, assuming your income and expenses don’t change in the meantime.
- Your credit score is likely to increase in the interim, making you more attractive to lenders and opening the door for additional low-interest balance transfer offers that you can use to pay down student debt — possibly with bigger credit limits to boot.
6. Evaluate Balance Transfer Card Offers and Understand the Cost of the Transfer
When evaluating balance transfer card offers, consider the key factors that contribute to the cost of the transfer and limit its potential size:
- Promotional Interest Rate. Balance transfer offers available to new applicants often tout an entirely interest-free period. If you qualify for such an offer, it’s clearly preferable to a low-but-nonzero offer. Low-interest offers — typically in the 1% to 10% APR range — are more commonly offered to existing cardholders. As a general rule of thumb, it’s not worth the effort to execute a transfer unless you can reduce your interest rate by four percentage points — for example, from 8% to 4%.
- Length of Promotional Period. This bears repeating — and repeating: It’s vitally important that you pay off your entire balance transfer before the end of the promotional period. Otherwise, you could find yourself on the hook not just for interest accrued on the balance left over but on the entire original amount of the transferred balance, retroactive to the transfer date. That’s likely to be enough to cancel out whatever you thought you’d saved. It follows that a longer promotional period provides more leeway for a larger transfer, so focus on offers with very long low-APR or 0% APR spans: at least 12 months and preferably 15 or 18 months, if not longer.
- Transfer Fees. Balance transfer fees typically range from 3% to 5% of the total amount transferred, or $30 to $50 per $1,000 transferred. Although that might not sound like a lot, balance transfer fees do significantly increase the cost of the transfer, especially over short periods of time. For example, a 3% balance transfer fee adds 6% (annualized) to the cost of a transfer that takes six months to pay off. So, before going through with the transfer, make sure you won’t pay more in balance transfer fees than you would in interest on the original loan during the payoff period. If you find that you will, you’re better off paying down the loan without making the transfer.
7. Don’t Assume You’ll Be Able to Transfer Any Remaining Balance After the Promotional Period
Successfully paying off part or all of a student loan balance with a credit card balance transfer is likely to improve your credit score over time. However, you shouldn’t plan on being able to keep the party going as your first transfer card’s promotional period draws to a close by transferring the remaining balance to a fresh transfer card. You can’t assume that you’ll be approved for that fresh card.
Look, you’ll probably have other balance transfer offers available to you after proving you can pay down a hefty transferred balance. But the risk that you won’t — that you’ll be left on the hook for hundreds of dollars in interest due on your unpaid balance — is too great to chance.
Bottom line: The safest move is therefore to plan to pay off your transferred student loan balance in full and only then begin thinking about a second transfer. If time is of the essence and your credit is good enough to qualify you for additional balance transfer offers while your first remains in progress, you can run multiple transfers in parallel. Again, just be sure not to leave a lingering balance as the promotional period draws to a close.
Best Balance Transfer Credit Cards to Make Student Loan Payments
The best credit cards to make lump-sum student loan payments are invariably low-APR credit cards with long 0% APR balance transfer promotions. This list includes cards with the best 0% and low-APR offers on the market right now, including some cash-back credit cards that are appropriate for everyday purchases and balance transfers.
Citi Double Cash® Card
The Citi Double Cash® Card has one of the best introductory balance transfer promotions of any cash-back credit card: 18 months at 0% APR, after which the variable regular APR applies. Qualifying transfers must be made within four months of account opening.
Moving forward, Citi Double Cash effectively earns 2% cash back rewards on all eligible purchases: 1% back when you make the purchase and another 1% back when you pay it off (in statement cycles when you make at least the minimum payment due). There’s no annual fee.
Citi Simplicity® Card
The Citi Simplicity® Card also has a 21-month 0% APR balance transfer promotion for new cardholders, after which variable regular APR applies. Qualifying transfers must be made within four months of account opening.
Citi Simplicity doesn’t earn rewards. On the bright side, it doesn’t charge an annual fee.
Citi Diamond Preferred® Card
The Citi Diamond Preferred® Card is a near-copy of Citi Simplicity, complete with a 21-month 0% APR balance transfer promotion for new cardholders. Qualifying transfers must be made within four months of account opening.
Citi Diamond Preferred doesn’t earn rewards or charge an annual fee.
Many debt-burdened borrowers use credit card balance transfers to reduce or entirely eliminate high-interest credit card debt. Although transferring student loan balances to credit cards offering low-interest promotional periods isn’t as commonly discussed, it’s inarguably a valid strategy for controlling education debt backed by private lenders.
A valid strategy, sure, but not a magic bullet. Anyone venturing down this path should mind its risks, especially the potential to incur interest at a much higher rate than the typical federal or private student loan if the balance isn’t fully paid down by the promotional period’s conclusion. Otherwise, this particular student debt cure could turn out to be worse than the disease.