Credit cards that help pay off student debt with rewards

Young Americans have had their share of economic turmoil, but one financial problem that persists for millennials and Gen Z is student debt. And, like any kind of debt, student debt can be suffocating.

Currently, the average student debt is around $37,787, according to the Education Data Initiative, while the average monthly student loan payment is roughly $460. This amount can easily be half the monthly cost of housing in the right place, paying for a car, or a decent amount to add to savings. Yet Millennials and Gen Zers have to spend time paying off their student loans, a long and exhausting financial commitment.

If this describes your situation, it’s not surprising that you might want to pay off your student debt as soon as possible by putting more resources into paying it off. In fact, there are several credit cards on the market that offer additional rewards for your student loan payments. They can be one of the tools to help you reduce your student loan balance faster. Let’s take a closer look at them.

When do you have to pay student loans with a credit card?

As a general rule, you cannot use a credit card to pay your student loan lender, whether government or private institution, directly. However, there are several ways to use credit cards to your advantage when it comes to your student debt.

If your student loan has a variable interest rate

As the Fed continues to raise interest rates, your student loan floating rate is likely to increase as well. Since variable interest rates depend on market conditions, you may end up paying more interest than usual.

So, if you’re about to graduate and part of your student loan has a variable interest rate, you can transfer your debt to a balance transfer credit card with a 0 percent APR offer. The best balance transfer cards usually provide zero interest for 15 to 21 months. Make sure you can pay off your debt within this time frame or you will end up paying even more in interest and credit card interest rates are much higher than loans.

However, you should be aware that you need good to excellent credit to qualify for the best balance transfer cards, and many cards charge a balance transfer fee, typically 3 to 5 percent. Also, if you have a federal loan and transfer your student debt to a credit card, you lose any protections such as repayment plans and forgiveness programs.

If you pay by credit card in full and on time

Paying off student loans with a credit card can be a good idea if you want to save on interest and pay off your debt faster.

Some credit cards offer rewards that can be redeemed for cash to pay off student loans. Others offer cashback or points that you can redeem for cash or direct deposit and then use those rewards for student loan payments. Keep in mind that receiving a reward depends on paying at least the minimum payment on time, and preferably the full balance every month. Some card issuers will not publish your rewards if you miss payments.

Using a credit card to pay off student debt is best when you have the funds to pay off your loan and just want to pay off your debt as quickly as possible. But if you don’t want to risk a lot of debt and think you won’t be able to pay your credit card bill on time, it might be better to pay your student loans in cash or by check as usual.

Credit cards that reward student loan repayments

While rare, there are a few credit cards that give you bonus money back when you redeem your rewards for student loan payments.

Laurel Road Student Credit Card with Cashback

The card returns 2 percent cash back when you use student loan rewards with most service companies in the US (you can check the list of relevant service companies here). In addition, you can exchange 1 percent cash for something else. It also offers an attractive $300 signup bonus if you spend $3,000 within the first 90 days, and it doesn’t charge an annual fee.

Sophie’s credit card

While the SoFi Credit Card is only available to cardholders with existing SoFi credits, the SoFi* Credit Card offers a solid cash back rate of up to 3 percent for a year when you set up direct deposit with SoFi. After that, you earn 2 percent cash that can be used to pay off SoFi student loans, among other options such as promotional offers through SoFi, saving or investing in a SoFi account, and SoFi personal loans. You can also redeem the statement credits, but then your rewards will lose half their value.

Sally Mae speeds up

Another great no-annual fee option for consumers with Sallie Mae student loans, the Sallie Mae Accelerate Card has a similar reward structure to the Laurel Road Card. If you use your rewards to pay off a student loan (federal or private), you will receive 2 percent cash back. If you redeem something else, you will receive 1.5 percent cash back. Added Bonus: You can claim up to $600 per mobile phone protection claim if you use your Sallie Mae card to pay your monthly mobile phone bill.

Alternative credit cards suitable for student loans

As we mentioned earlier, transferring your student loan to a balance transfer card is one option, albeit an aggressive one, that you should only choose if you are confident that you can pay everything off before the end of the initial APR period. Strong choice will Citi® Diamond Preferred® Card, which has a 0 percent initial APR offer on balance transfers for 21 months. After that, your regular APR will increase from 16.74 percent to 27.49 percent variable.

Another option is to use a high yield cashback card to earn cashback, redeem those rewards with cash or direct deposit and put those funds towards your student debt. One of the possibilities is Pursuit of Unlimited Freedom®, which earns 5% Cashback on Ultimate Rewards trips, 3% on restaurant and pharmacy purchases, and 1.5% on everything else. As an added bonus, it will earn an additional 1.5 percent cashback on everything (up to $20,000) in the first year. With stakes like these, you’ll be surprised how quickly your rewards can accumulate.

If you choose this strategy, be aware of the cost to redeem your cashback card. For example, Chase Ultimate Rewards points are still worth 1 cent when redeemed for direct deposit, while Capital One miles are worth 0.5 cents when you redeem miles for a credit statement or check.

Is the reward worth it?

With all that said, remember that student debt is not the most detrimental to your financial health. It may be a good idea to pay a little more for a student loan when you can, especially if the interest rate is high. However, don’t worry too much about this if you’re working towards other financial goals.

If you are determined to pay off your student loans as soon as possible, the reward can contribute a decent amount to settling your debt. For example, with a SoFi credit card, assuming you spent $15,900 a year, you could earn $318 in cash while paying off student loan payments. This is nothing to mock.

However, before you focus on putting every extra penny on your student loan, you should consider other financial priorities that may be more important. Some things that come to mind are paying off credit card debt, creating an emergency fund, and contributing to your 401(k). Once you have all of this for you, and there is still room in your budget for a breather, you may want to consider adding a supplement to your student loan.

bottom line

If you’re in a good financial position and feel ready to try and pay off your student debt early, a cashback credit card can earn you rewards to help you do just that.

From the available cards, you can choose one that rewards you for paying off student debt, a balance transfer card, or a money back card. Of course, be sure to research your finances and your goals when deciding which one to choose.