Updated on 12.16.15

Using Credit Card Rewards to Pay Off Student Loans

This can be a clever way to trim your debt, but pay attention to the fine print.

Pursuing cash back and travel rewards is an easy way to save money on family vacations, fun adventures, and educational trips. But did you know you could use credit card rewards to pay off student loans?

By signing up for the right rewards card, meeting a minimum spending requirement, and earning a hefty sign-up bonus, it’s possible to rack up rewards that can go straight toward your outstanding debts — including those nagging student loan bills.

Recently, my friend Jacob from I Heart Budgets executed this strategy to take a chunk out of his family’s lingering $6,000 student loan debt. After signing up for two Citi ThankYou Premier Cards (one for him and one for his wife) and spending $3,000 within 90 days on each card, they each earned a 50,000-point signup bonus — good for two $500 student loan payoff checks. And after putting some more expenses on their cards, they each had enough points to score an additional $50 student loan check.

In the end, that means they paid off a total of $1,100 in student loans with credit card rewards — and all with minimal effort on their part. Sounds easy, doesn’t it?

Using Rewards to Destroy Student Loans: Dos and Don’ts

The process is simple, Jacob says — but there are some rules you should follow to ensure everything goes smoothly and that you don’t pay out of pocket for the privilege.

Use your new card for regular expenses to hit the spending requirement. “Automate all bills and put all spending on credit cards to hit the minimum spending requirement,” says Jacob. In order to earn a hefty signup bonus, you’ll need to “spend X number of dollars” on your card within a designated period. It’s usually in the $1,000 to $3,000 range within a span of 90 days, but you should check with any card you sign up for to get specific details.

Make sure your student loan company accepts checks from third parties. This step is crucial, says Jacob. It’s important to call your student loan servicer to find out if they allow checks from third parties, including a bank. In Jacob’s case, the servicer wanted the third-party check mailed to a specific address and filled out with Jacob’s student loan account number.

Target your loan’s principal. “Make sure the check will apply to your principal balance,” says Jacob. If you want the extra payment to go straight toward your loan balance, you’ll need to let your student loan servicer know that. Otherwise, your payment may be looked at as future payments — or designated to put you a few months ahead on your regular monthly payment.

Make sure your rewards credit card offers this option. Jacob’s Citi ThankYou Premier Card offered an option for student loan payments, but that doesn’t mean all cards do.

Credit cards that fall under the Chase Ultimate Rewards program, for example, don’t offer a direct option to pay off your student loans. Instead, as with some other rewards cards, you can redeem your points for a direct deposit to a linked bank account, and make the student loan payment yourself. Other cards that offer straight-up cash back may send you a check in the mail, but you’ll need to deposit it and send the money to your account on your own.

using a credit card at gas station

Don’t overspend just to hit a credit card signup bonus. Just aim to put more of your regular expenses on the card, such as gas, groceries, and utility bills. Photo: Frankie Leon

While this loan payoff strategy may seem cut and dried, there are lots of pitfalls to avoid along the way. Here are some things to watch for:

Rewards aren’t worth overspending. Don’t “blow your budget chasing credit card bonuses,” says Jacob. Instead of overspending to earn “free points or rewards,” you should only sign up for cards with an easy-to-earn signup bonus.

In Jacob’s case, he and his wife were able to meet the $3,000 minimum spending requirement on both of their cards by staggering the signups and using them to pay for purchases they were going to make anyway — things like groceries, gas, and utility bills.

Don’t forget to pay your bill right away. To maximize your rewards, you want to avoid paying interest altogether. The best way to do this is to use your card for regular purchases you planned to make anyway, then pay it off immediately with cash in the bank.

Double-check with your student loan company. Don’t send the check without calling your student loan servicer and getting the required info for the check, says Jacob. If you’re using Citi’s student loan payoff option, this is especially crucial. Whenever you make a large extra payment of any kind, it’s essential that you call your student loan servicer to ask for any specific instructions.

Paying Off Student Loans with Rewards: The Final Word

According to Jacob, the entire process was fairly painless and would be easy to replicate. And for him, the timing of this option was perfect.

“I love accumulating credit card bonuses for flier miles and free hotel stays, but with only $6,000 left on our loans, it was time to get serious about killing this debt,” he said. “I knew I needed to do this.”

That being said, this debt payoff strategy may not be right for everyone. In fact, it is a bad idea for anyone carrying revolving credit card debt or personal debt already, or anyone who has struggled to pay off credit cards in the past.

Using rewards in this way takes a certain amount of discipline, and if you’re not careful, you could easily end up worse off than when you started. And if you’re trying to kill off those student loans, the last thing you need is a new credit card bill.

But for those who are debt-free otherwise and tired of student loans, using rewards is a smart way to speed up your loan’s demise. Just be careful to follow the rules, and as always, read the fine print.

Have you ever used credit card rewards in a creative way? How are you paying off your student loans? 

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