Danger Ahead: Using Plastic to Repay Student Loans
In past posts, I’ve referred to the website TheDollarStretcher.com. Not only is it full of thrifty ideas from readers and bloggers alike, it also tackles tough issues with insight and clarity. One of those topics is using credit cards to repay student loan debt. This particular article posted on July 1, 2013 and was written by Minda Zetlin. I encourage you to read the entire article. Meanwhile, I will summarize Ms. Zetlin’s thoughts and credit her sources. With high interest rates on student loan debt, particularly private loans, borrowers may be tempted to use credit cards to repay student loans. Gaining reward points or using promotional cards with low interest rates, makes the idea even more appealing. However, according to the experts Zetlin consulted, it rarely makes financial sense to shift student loans to credit cards. And if you’re thinking about doing so to eventually wipe out the debt in bankruptcy, think again! You will likely fail and may be flirting with disaster if you do. Obstacles to consider:
1. It may not work
Mark Kantrowitz is the publisher of Edvisors.com, a network of sites offering educational resources. He is quoted as stating “Any refinancing of a qualified education loan is still considered a qualified education loan,” meaning the credit card debt would be considered non-dischargeable in bankruptcy just as student loans themselves. Even worse, if you transfer the debt with the intention to file bankruptcy, it may be considered fraud. This could lead to some pretty ugly consequences such as 1) no bankruptcy protection, and 2) likely being sued by the credit card company. Expect to pay more Many student loan lenders don’t accept credit card payments. According to Kantrowitz, while the US Department of Education will accept credit cards, it does so only for borrowers in default. While private student loan lenders may accept credit cards, those transactions are often charged a separate service fee. Another important consideration - the interest rates charged for credit cards are often higher than rates for student loans. The interest rates of federal student loans are currently at 6.8%. Private loan interest rates average around 8% but they are often variable, meaning they adjust upward as interest rates increase. But interest rates on credit cards are often higher, easily in the double digit range.
2. Other options may be better
If you owe federal student loans, look into income based repayment plans. Monthly payments are tied to a percentage of your discretionary income over the poverty guidelines for a family of your size. You can find more information online at www.studentloanborrowerassistance.org. Zac Bissonnette, author of “Debt Free U” is quoted as saying “With a federal loan, income based repayment will always be your best bet … The way those formulas work is very, very kind.” You should also know that under an income based payment plan, any loan balances after 25 years of payments will be forgiven. Under current tax law, the amount forgiven may be considered income to you in the year of forgiveness. Although that could change (who knows what Congress will do?), you should plan on higher income taxes that year and save for any potential tax liability. Even if you end up owing taxes, it should be far less expensive than repaying student loans in full. If you owe private student loans, however, you don’t have income-based repayment options. Bissonnette goes on to say your only choice is to negotiate with the lenders to adjust a repayment plan. His best advice: “… tell everyone you know in high school to stay the hell away from private student loans.” Amen, Zac!
3. Bankruptcy is an uphill battle
Without a doubt, student loans are seldom discharged in bankruptcy. To discharge student loans through a bankruptcy filing, you must be able show that repaying your student loans “will impose an undue hardship on you and your dependents,” now and for the long-term future. The other problem is that bankruptcy courts around the country use different tests to meet this standard. So, be sure to consult a bankruptcy attorney experienced with student loan discharges before you go this route. Getting back to fraud and bankruptcy: Richard Gertler, a bankruptcy attorney states it all “comes down to the intent of the party.” If you intentionally convert student loans to a credit card and plan to file bankruptcy, that’s fraud. “But if you had no ill intent and continued paying the (credit card) down until some circumstance prohibited you from doing so, then there was no intent to defraud the company.” Some factors that may work in your favor: The interest rate on the credit card was lower than your student loan rates. However, that is highly unlikely with typical credit card interest rates at double digits. Any attorney worth his/her law degree would argue what logical person would transfer student loan debt to a credit card with higher interest rates, usually by several percent. Another positive factor: the credit card company invited you to transfer student loans to its card. When one of Gertler’s clients used such a promotion but later lost her job and filed bankruptcy, the company disputed the discharge. When Gertler used the company’s own promotional materials against it in court, the case against his client was dismissed.
While repaying student loans with plastic may be fraught with perils, talking with one of LSS’ certified financial counselors may help you see other options to tackle student loan debt. We’re here to help you conquer your debt, whatever the source.
I encourage you to give us a call. We have financial counselors that specialize in helping with student loans. They can take a look at the overall picture and not just a segment. And how great would it be to have a non-judgemental person look at your financial situation. Give us a call today at 888.577.2227 or visit our website at ConquerYourDebt.org. Author Barbara Miller is a Certified Financial Counselor at LSS and specializes in Bankruptcy Counseling.