Putting Student Loans on Credit Cards (and Filing for Bankruptcy)
As the amount of student loan debt continues to break records, people are seeking new ways to escape the burden of repayment. According to FinAid, the national total for student loan debt is growing at a rate of $2,853.88 per second! While there are a few practical solutions for those facing economic hardships, one option is extremely risky and could lead the debtor deeper in debt and into serious legal trouble. The “strategy” we are referring to here is putting student loans on credit cards. While there are a couple different methods and “goals” for this strategy, we believe they are all bad ideas. Let’s discuss why.
Student Loan Interest Rates vs. Credit Card Interest Rates
Ok, let’s just take a quick look at average interest rates for student loans and credit cards. If you are going to move your loans to a credit card, it would make sense to get a lower interest rate, right? But here’s the reality:
For federal loans taken out since July 1, 2013 the following interest rates apply:
- Stafford Loans for undergraduates: 3.86%
- Stafford Loans for graduate and professional students: 5.41%
- PLUS Loans: 6.41%
- Perkins Loans: 5%
What about credit card interest rates? Here are the averages according to Bankrate as of October 16, 2013:
- Fixed: 13.02%
- Variable: 15.36%
As you can see, moving student loans to credit cards leads to paying a lot more interest.
Wait, 0% interest! Is this really happening?
Ah, here is the x-factor; here is the “catch,” the gimmick that makes this whole scenario possible. Credit cards sometimes offer what’s called an “introductory rate” of 0%, meaning consumers don’t pay interest during this time. The period typically lasts between six and 24 months. So while the credit card rate is normally much higher than the student loan rate, it’s lower during this period. Of course, the catch is that once this period expires, the balance on the card(s) will be subject to the high interest rate.
Considering the average student loan debt is around $26,000, this does not seem like a reasonable option. In most cases, consumers will not be able to put that level of debt on a credit card and pay it off within a year or so. Perhaps some consumers would be able to find a way around this as well by using this strategy multiple times with multiple cards that offer an introductory rate. But, this is still risky and would involve opening numerous credit cards unnecessarily, likely damaging your credit score. A better option might be to read our guide on the best way to pay off student loans. If you’re still struggling, check out some of the additional options at the bottom of this post.
Most student loan servicers do not accept payment in the form of a credit card. This means that your best bet for using this method involves either balance transfer checks or cash advances. The problem is that both of these methods involve fees that make it less appealing from the very beginning. If you are paying between three percent and five percent in fees to save on a loan that has an interest rate of six percent, the savings will be marginal.
No Safety Net
So far, we have established that putting student loans on a credit card can hurt a credit score and lead to high interest after the introductory period, but there’s one more disadvantage. The most important reason consumers should not choose this option is that it strips away the benefits of their federal loans. This strategy removes the safety net that comes standard with federal loans. Flexible repayment programs and plans that make accommodations for low income-earners are just some of the benefits of federal loans. These programs help struggling consumers, and this type of assistance is not typical available from credit card companies.
Let’s be honest, as much as we hate to admit it, consolidating student loans onto a credit card can work. It is possible and could save you money. But the chances of success are low and the risks are high. Unemployment, an injury or illness in the family, and other unforeseen circumstances could easily put a dent in this plan. While it is theoretically possible to save money with this consolidation technique, it just isn’t worth the risks.
Another Strategy: Discharging Transferred Student Loans in Bankruptcy
Ok, so hopefully we have convinced you that putting student loans onto a credit card is a bad idea. But for some, this isn’t the end goal. What’s the end goal you ask? Bankruptcy. Wait, what? You are surprised that bankruptcy would ever be someone’s goal? You thought bankruptcy was to be avoided at all costs…?
The idea behind this strategy stems from the fact that student loans typically are not discharged in bankruptcy. Sure, it happens, but it’s extremely rare. Credit cards on the other hand, that’s the kind of thing that gets discharged all the time. So the idea is to move the loans to credit cards where you can make them disappear. While it sounds like a creative workaround, it’s a bad idea. For several reasons.
Student loan debt is still exempt from bankruptcy even when it is reorganized or refinanced through other forms of credit. That leaves the debtor with the obligation to repay the balances and with the higher interest rates that are likely to come with them. Oh, and there is also the possibility of being hit with legal charges if the court believes that there was intent to defraud the lender. To make matters even worse, you’ll still be responsible for repaying the balance even if you go to jail! There’s more…
The Effect on Your Credit Score
Pursuing bankruptcy intentionally is like driving your credit score off a cliff. Opening multiple credit accounts for this purpose will hurt your credit, and bankruptcy will have an even bigger impact. The lasting effects of this are costly too, as future loans will become much more expensive due to the increased risk you pose to lenders.
Take a look at how the various strategies discussed here can affect credit.
Purposely rearranging your student loans in this way with the end goal of discharge via bankruptcy is considered fraud and can land you in prison. But in order to be charged for this type of fraud, the credit card company would have to realize what’s going on and take legal action (it might surprise you to find out that they don’t always catch this) and they would have to be able to prove intent. In other words, if you genuinely thought that moving student loans to credit cards would help manage your debt and pay it off, you may not be charged with fraud. Typically courts makes this decision based on the interest rate you were paying before and after the transfer and any marketing from the credit card company that encouraged you to use the card for this purpose.
If you moved your student loans to a credit account with a higher interest rate, that would be a red flag. You would be making your financial situation more challenging, and this might be evidence to the court than you had fraudulent intentions. On the other hand, if you moved them to a lower interest rate account, made payments consistently and then fell ill or lost your job, your situation is more likely to be viewed as a genuine attempt to pay off your debt. The court also examines the creditor’s actions. If a credit card company is specifically encouraging consumers to use a given card to pay off student loans, it will be very difficult for that company to sue consumers who try to discharge the account in bankruptcy.
Like we said before, this strategy could work. It’s certainly possible that you could re-shuffle your debt and file for bankruptcy without being caught by the creditor. But at what cost? Even if you are successful in this plan, you aren’t “winning.” You risk legal charges, jail time, and your credit score. There is a better way.
Better Options for Student Loans
Thankfully, there is legitimate debt relief to help struggling consumers. The best might just be Income-Based Repayment (IBR) offered by the US Department of Education. If that doesn’t work, or if you don’t qualify, there are many creative ways to legally pay off your college loans. Here are just a few examples:
Federal Service Programs
Volunteers for AmeriCorps can receive stipends to help pay off their student loan debt.
*Note that many organizations are part of the AmeriCorps network (example: Teach for America)
Peace Corps Volunteers qualify for special deferment and cancellation options.
Those who serve in the military are also eligible for some benefits, and even some corporations help their workers pay off student debt.
Oh, and don’t forget about Public Service Loan Forgiveness offered by the federal government.
Do any of these methods work for you? If not, don’t worry. There are even more student loan repayment programs that you may qualify for. Learn how student loan counseling can help decide which one is right for you all while leading you toward a healthier financial future.
This article only talks about Federal Student loans. I was only able to get about $15,000 in federal loans enough for about 1 year of college. This srticle does not address bank Loans. the $60,000 I have in bank loans is does not have the benefits. I am planning to pay my $15,000 with the Educator in low income area grant after 4 years of service but I will still be stuck with the other 3/4 of my dept.
Dustin, that’s a good point and you are certainly right that private loans are more problematic. Depending on your credit, refinancing those private loans might be an option. It’s one of the best ways to make those loans more manageable. Maybe our article on refinancing private loans can help. Good luck!
When will the federal government take any accountability for allowing these banks to ruin peoples lives with false hopes of opportunity in a disastrous market? How is this different than the 2008 housing market?
It’s 2015, can we please stop regurgitating the same information about income contingent repayment plans for FEDERAL loans when it’s been stated over and over again that the main problem is PRIVATE student loans? I don’t mean to be harsh, but there are thousands of other articles out there that have been saying the same thing while ignoring the elephant in the room. Yes, unfortunately, there are a lot of people who don’t know about all the Federal options out there, but the well has been tapped dry on this subject. If your’re going to bring out the same old options (ICR repayment plans, military forgiveness, public service forgiveness, teacher forgiveness, etc.) at least do your due diligence and inform people that you are talking about government loans only. it’s a disservice to you and the students your attempting to help to leave out that very basic and important information.
That’s a great point, and we’re in total agreement that private loans are the biggest issue. That’s why we wrote a post about repaying private student loans, and it’s our most popular post ever, having helped thousands of consumers. Please check it out!
Thank you. Very informative. The exact information I was looking for. I will now not have to put myself in a precarious situation, and possibly avoid jail time.
Awesome, glad it helped! Here’s to avoiding jail! Best of luck.