Student loan debt is a massive burden for many recent and not-so-recent graduates. In 2020, about 45 million students owed an average of $37,584 each, according to EducationData.org. This debt isn’t just a problem for private university graduates; public school grads also carry an average debt of $30,030. The total student debt in the U.S. hit $1.68 trillion in 2020, growing six times faster than the broader economy.
With tuition costs on the rise and scandals at elite institutions, it’s no surprise that many are questioning the value of a college education. But for those who’ve already graduated or dropped out, they’re stuck with the bill and struggling to stay afloat.
To manage student debt, many borrowers use a multi-pronged approach that goes beyond just setting up automatic monthly payments and hoping for the best. One lesser-known strategy that could help millions of private student loan borrowers with good credit is a low-interest credit card balance transfer. While this strategy won’t allow an average income earner to pay off their entire student loan balance during a single 12- to 24-month low-interest balance transfer period, it can significantly reduce student debt balances and cumulative interest obligations. If repeated often enough, it can help achieve student debt freedom sooner.
However, this strategy isn’t without risks. Some are obvious, like failing to pay off the transferred balance before the low-interest period ends and getting hit with a regular credit card interest rate that’s much higher than the original loan’s. Others are less known, like a significant increase in credit utilization that could harm the borrower’s future chances of credit approval.
If you’re considering using a low-interest credit card to reduce your student loan debt, it’s important to plan carefully. 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, and choose the best balance transfer card for the job.
Here are some steps to consider:
-
Determine Whether You’re a Good Candidate for a Credit Card Balance Transfer: Your credit score is a key factor here. Most low or 0% APR balance transfer promotions are reserved for applicants with good or excellent credit. If your score isn’t where you’d like it to be, focus on improving the components that need the most work.
-
Eliminate Federal Student Loans From Balance Transfer Consideration: Federal student loans come with a host of borrower-friendly benefits, so it’s best to reserve this strategy for private student loans only.
-
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.
-
Confirm That Your Loan Servicer Allows Balance Transfer Payments: Before applying for a balance transfer credit card, make sure your student loan servicer allows lump-sum payoffs via credit card balance transfer.
-
Decide How Much to Transfer: 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.
-
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.
-
Don’t Assume You’ll Be Able to Transfer Any Remaining Balance After the Promotional Period: The safest move is to plan to pay off your transferred student loan balance in full and only then begin thinking about a second transfer.
While transferring student loan balances to credit cards offering low-interest promotional periods isn’t as commonly discussed, it’s a valid strategy for controlling education debt backed by private lenders. However, it’s 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.
