If you took out $20,000, $30,000, $50,000, or more in student loans to pay for school, paying the debt back can feel impossible.
For most people, paying off massive student loan balances takes much longer than the “standard” decade-long repayment plan offered by the Federal government. And the interest rates of 6% or more on your loans aren’t helping matters. A person with $50,000 in debt at a 6% interest rate will pay $3,000 in interest this year. That’s $250 per month!
But in some cases, student loan borrowers can transfer part (or all) of their student loan balances to 0% credit cards. This reduces the amount of money you have to put towards interest payments. And shockingly, carrying credit card debt instead of student loan debt could put you in a safe financial position.
But you have to be very careful when you decide to transfer your student loan balance to a 0% credit card. Here’s what you need to know about using 0% credit card offers to pay off your student loans.
What Is the 0% Credit Card Method?
The 0% credit card method is the simplest and safest method of “transferring” student loan debt onto a credit card with a 0% promotional interest rate. You’ll notice that I did not use the word “refinance.” That’s because the 0% credit card method does not involve refinancing existing debts. The most accurate way to describe the 0% credit card method is to say that you’re moving money around.
You won’t use a balance transfer or a traditional refinancing procedure in the 0% credit card method. Instead, you’ll spend money on a credit card with a 0% promotional interest rate. This is a card that offers a 0% interest rate on all purchases for a limited period of time. Right now, the best 0% offers are as long as 18 months. Instead of paying off your credit card right away, you’ll use that money to pay down your student loans.
For example, check out these 0% APR credit cards.
At a high level, the method involves eight simple steps:
- Open a new 0% APR credit card. This is not a 0% balance transfer credit card.
- Calculate how much you want to transfer to your new credit card.
- Put your regular household spending on the credit card until you’ve spent the amount calculated in step two.
- Instead of paying off your credit card balance in full, make minimum payments on the credit card. Put every dollar you spent towards your student loan debt.
- Stop spending on the 0% credit card.
- Make regular payments on your student loans.
- Pay off the 0% credit card before the promotional rate expires (or use a balance transfer to pay off the debt).
- Repeat as necessary.
The 0% credit card method isn’t the only way to transfer money to a 0% credit card. In fact, this article covers four methods to transfer a student loan balance to your credit card.
However, I’ll only focus on the 0% credit card method because it tends to be the safest and least expensive method for three reasons.
First, you can easily control the exact amount of your “refinance” procedure. The amount you spend on the 0% credit card is the amount you refinance.
Second, by spending on the new credit card you avoid possible legal entanglements. When you buy groceries with a 0% credit card, that debt becomes eligible for bankruptcy if you default. If you transfer some of your Federal student loan balance to the card, it’s a legal gray area. Hopefully, you’ll avoid defaulting on the debt, but it’s always prudent to think through these issues.
Third, by purchasing using 0% credit cards, you can avoid paying balance transfer fees which could eat into your savings.
As an added “bonus” many credit cards (even those with 0% promotional offers) will give you a sign-up bonus if you spend a certain amount within 90 days. You can use that bonus to pay off your debt extra fast!
Risks of Using the 0% Credit Card Method
Transferring debt from your Federal student loans to a 0% credit card is risky. These credit cards only offer the 0% promotional rate for a limited period of time. After that time, your credit card issuer will raise the rate on the balance, often to 18% or more.
Done incorrectly, a borrower could transfer a low-interest debt into a high-interest debt.
Borrowers also face credit score risks. When a lender sees that you have a rising credit score utilization, they may reduce your available credit. This could destroy your credit score very quickly. The only way to prevent this issue is to have a ton of available credit, from a variety of credit card lenders.
Benefits of Using the 0% Credit Card Method
For most borrowers, using the 0% credit card method is too risky. In some (maybe most) cases, it is better for borrowers to maintain the protections offered by the United States Department of Education.
But, in select cases (outlined below), using the 0% credit card to pay off your student loans offers dramatic benefits for you as a borrower. Here are a few to consider:
- Reduced cost of interest
- Quicker time to loan payoff
- Maintain some Federal benefits, while refinancing some debt at a lower rate
- Possible to bankrupt credit card debt in the event of major financial catastrophe (student loans are largely not eligible for bankruptcy)
When to Consider the Use of a 0% Credit Card Method
While using the 0% credit card method has several benefits, this isn’t a good option for many borrowers. You should meet all seven of these criteria before you even consider this option:
- You are not pursuing loan forgiveness through Public Service Loan Forgiveness.
- You have at least a few thousand dollars in an emergency fund.
- You have a credit score greater than 720. (Check using Credit Sesame).
- You do not have existing credit card debt.
- You are reducing the principal balance on your loans. (This is true if you’re on a standard repayment plan or a standard debt consolidation repayment plan. If you’re on an income-driven repayment plan, your loan balance may actually be growing over time. Review your most recent loan statement(s) to see whether your loan balance decreased after your last payment.)
- You can easily afford to make extra payments towards your debt.
- You have at least $20,000 in available credit on your credit cards.
- You don’t want to take out a mortgage or a car loan in the next 24 months.
You may be thinking, “What type of recent graduate will meet all these requirements?” Honestly, not many. However, most people carry student loans with them well into their careers. These days, many financially established people still have student loan balances.
If you’re 22 or 23 years old, and you don’t qualify yet, don’t worry. You can come back to this method in a few years when you’ve had time to increase your income, establish your credit, and start saving cash.
How to Transfer Your Student Loan Debt to a 0% Credit Card
Open a New Credit Card with a 0% Promotional Rate
Even if you have an existing credit card with a 0% promotional interest rate, you’ll want to open a new one. Opening a new credit card will increase your available credit limit. This will help protect your credit score, even if one of your credit card lenders decides to lower your available credit limit.
You can find the best credit cards with a 0% promotional interest rate here. Choose to apply for the credit card with the longest 0% purchase period (or apply for multiple cards, it could help your credit score in the long run).
Maintaining a great credit score is imperative to the 0% credit card method. That means you want as much available credit as possible, and you must make all your debt payments on time.
Read more about how to build a great credit score.
Calculate How Much You Want to Put on the 0% Credit Card
Before you pursue the 0% credit card game, you need to decide how much money you want to transfer to the 0% credit card. There are two reasonable methods for deciding this.
This method will help you determine the amount you can easily afford to pay off within the the promotional window. It is the lower-risk method of transferring debt.
To calculate this, simply multiply the amount of extra money you’re putting towards student loan debt by the length of the promotional window.
Let’s assume you can easily afford to put $150 per month extra towards your student loans. Additionally, assume you have an 18-month balance transfer card.
In this case, the maximum you want to spend on your 0% credit card is calculated this way: 18 months x $150 per month = $2,700.
For maximum safety, you may want to give yourself a few months as a buffer, so the amount you want to spend may be closer to $2,400.
The second method is much riskier, but it’s ideal for borrowers who want their student loan debt gone yesterday.
In this method, the amount you’ll spend on the 0% credit card will equal the balance of your smallest student loan debt.
For example, if you have a balance of $4,702 on a Perkins Loan, you’ll spend $4,702 on the 0% credit card. This will allow you to pay off your Perkins Loan. That payment (plus any extra money) can then go towards paying off the credit card.
Spend on the 0% Credit Card
The other huge risk that you face when using the 0% credit card method is the risk of overspending. A 0% credit card rate is not a pass to spend carte blanche.
Instead of booking a crazy vacation or buying a puppy and puppy accessories, put your regular household spending onto the credit card. Pay for boring stuff like groceries, insurance, your cell phone, and gas using your new 0% credit card.
Carefully track your spending on the card, and only spend the amount you calculated in step two. If the card has a sign-up bonus, you may want to continue to spend on the card until you meet the bonus, but that will change how your new repayment plan works.
If you’re single and frugal, spending the amount calculated in step two could take a few months. However, a typical family can very easily spend $2,000 to $3,000 per month on credit cards without breaking their spending habits.
Put the Money Towards Your Student Loans
As you spend money on your 0% credit card, you want to put that money towards your student loan. Did you spend $350 on your credit card this week? Make an extra $350 payment towards your student loan.
As needed, make the minimum payments towards your credit card, but put the rest of the money towards the student loans.
Stop Spending on the 0% Credit Card
Once you’ve reached your magic spending number (calculated in step two), stop spending on the 0% credit card. You don’t want your credit card balance to grow.
If you want to keep spending on a credit card, consider opening a new cash-back rewards credit card or a travel credit card. With these new cards, you can do some travel hacking (and you’ll raise your credit limit again). Just be sure to pay off all new credit cards in full each month.
Make Regular Payments on Your Student Loans
Now that you’re no longer spending on your 0% credit card, you don’t want to put extra payments towards your student loans. Simply make the regularly scheduled payments to your student loans.
Put Extra Money Towards the 0% Credit Card
Now that you’ve returned to making standard payments on your student loans, you should have extra room in the budget to pay off your 0% credit card balance. Put the extra money towards the credit card balance, so that it starts to fall over time.
Depending on the amount you transferred to the 0% credit card, your goal may be to pay off the credit card balance before the promotional rate expires. If that’s not realistic for you, you’ll want to look into opening a new 0% credit card before the end of the promotional period. This will allow you to put new spending on the new credit card, so you can pay off the existing credit card before the promotional period ends.
You may also want to consider a balance transfer credit card which will give you a 0% rate on balance transfers. However, these cards often come with a 3% balance transfer fee.
Repeat as Necessary
In a lot of cases, your first round of the 0% credit card method will only save you a few hundred dollars in interest. But as you gain familiarity with the 0% credit card game, you may become more confident transferring larger sums to 0% credit cards. You may even have two or more 0% cards with balances at the same time.
The more money you “transfer” to a 0% credit card, the more money you’ll save in interest costs. However, larger credit card balances translate to larger risks. If you don’t carefully watch your credit score, you might not be able to find 0% credit card offers easily.
Should You Use the 0% Credit Card Method to Pay Off Your Student Loans?
Please do not start transferring money to a 0% credit card before you’ve considered both the benefits and the risks. It can be complicated, and you don’t want to end up further in debt, in default, or destroying your credit because you weren’t financially ready for the 0% credit card method.
However, if you are ready to use the method, enjoy paying off your student loan debts even faster!
Maybe Just Consider Refinancing?
Now that you understand how it could be done, and what the risks are, you might just be thinking of refinancing your student loans instead.
If you can't pay off the balance before the promotional APR period expires, then your next best option is to get a lower rate on your loans in general.
Here's our list of the best places to refinance your student loans. If you have great credit and income, and are still looking to refinance your loans over a short period of time (say 3 years), then you could get a rate potentially as low as 3.5% as of November 2018. While not as attractive as 0% - remember, that 0% is only for about a year, then jumps up significantly.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.