Guide to Paying off a Student Loan With a Balance Transfer

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Updated on Tuesday, October 20, 2015

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Do you have a loan with a high interest rate you’re trying to pay off? Is it frustrating you to see so much of your monthly payment going toward interest instead of principal?

If you’ve been looking for solutions, chances are you’ve come across 0% interest balance transfer offers from credit card companies. What you might not be aware of is that you can use these offers to pay off personal loans and student loans – not just other credit card debt.

How a Balance Transfer Works

Is the concept of a balance transfer new to you? Here’s a quick example of what it looks like:

You have a $2,000 balance on Credit Card A with a 15% APR. You get a 0% APR balance transfer offer from Credit Card Company B.

You can transfer the $2,000 from Credit Card A onto Credit Card B (you may incur a balance transfer fee, depending on the offer), and pay 0% APR for a select period of time instead of the 15% APR you were paying.

Note that you’re not actually completely paying off your debt. The balance from Credit Card A might be paid off (thanks to Credit Card B), but you’re still on the hook for repaying the $2,000 you transferred to Credit Card B. Balance transfers simply mean you’re shuffling your debt around to a lower interest rate in order to pay it down faster, not eliminating it with the move.

Many credit cards offer 0% APR periods from 12 to 18 months, with some even over 20 months. Why bother with a balance transfer? You’re saving money because you’re paying less interest. With a 0% APR, your payments go directly toward the principal of the balance.

There is one catch, though – you must be able to pay off the balance by the time the 0% APR promotion expires.

We used credit cards in this example, but the same holds true for other loans. If you have a personal or student loan, you can transfer that debt to a credit card with 0% interest while paying off your original personal or student loan. Let’s take a look at how this is possible.

How to Pay Off a Loan With a Balance Transfer

Before you consider using this strategy, you should have a decent credit score; at least 700 and above. People who have been completely responsible with credit in the past (they haven’t missed any payments, and can afford to pay extra) would be the best candidates for this strategy. They simply have debt that’s costing them too much.

You can use a variety of methods to transfer a balance: you can call the credit card company offering the 0% APR promotion and inquire about it; you can log onto your account online if you already have a card with an offer; or you can use a balance transfer check that was mailed to you to write a check to yourself, and receive the funds in your bank.

Just beware, if you log into your account for an offer, it likely won’t be the most competitive option on the market. Instead of getting 0%, you might get 5% APR or something similar. The best offers come when you actually move your debt from one bank to another.

Warning before you proceed. Different lenders have different policies on whether or not you can pay using a credit card. Check with your lender first to see what payment options are available to you. A balance transfer check may be the only option for you.

Calling a credit card company may be the best idea as you can ask the representative questions about fees and the overall process. You can also attempt to negotiate the balance transfer fee. That might sound a little crazy, but Sandy Smith of Yes I am Cheap has successfully negotiated her balance transfer fee down a few times and highly recommends others do the same. You have nothing to lose by asking.

Stephanie from Six Figures Under used this strategy to pay off student loan debt as well, and recommends calling and asking for a better rate if you’re unable to receive a 0% APR offer (some credit card companies offer 1% – 2%).

What happens after you write a balance transfer check? Once the check is cashed, the balance is drawn from your credit card. If you have a limit of $10,000 on your credit card, and you write a check for $5,000, you’ll then owe $5,000 on your card. It’s very similar to a “traditional” balance transfer.

In some cases, you may be able to call a representative from the credit card company and give them the loan account information. They can then initiate the pay off and transfer on their end, with the same result of your credit line being drawn upon.

Please be wary of using balance transfer checks as there can be a lot of hoops to jump through. Some credit card companies won’t send you balance transfer checks, even if you call and request them, until months after you’ve been approved for the card. Unfortunately, balance transfer offers typically expire after 60 days, so this might not work out.

Others have had trouble cashing the checks. If you’re considering using a balance transfer check, read the fine print to make sure the math works in your favor, as some have higher balance transfer fees than credit cards.

When Should You Consider a Balance Transfer?

There are many factors to take into consideration. Besides being able to pay off the balance in full before the 0% APR rate expires (which will require a large monthly payment in some situations – be sure you can afford it), you have to see if you’re actually saving money. 0% interest sounds great, but if you’re paying off student loans, you should be aware the interest you pay on them is tax deductible.

To compare whether or not you’re saving money, consider the balance transfer fees you’ll have to pay, the amount of interest you’ll be able to deduct on your taxes (if applicable), or the amount of money you’ll be saving by transferring. Is it worth it?

For example, let’s say you have a $10,000 balance with a 6.8% APR and you have 5 years left on the loan. Your monthly payment is currently $197.07. You’ll pay a total of $11,824.20 over those 5 years.

If you were to transfer this loan to a 0% APR credit card with a promotional period of 18 months, you’d be paying $558.33 per month, saving you $1,774.18 in interest (paying nearly $10,050 total). This is assuming balance transfer fees cap out at $50 – each credit card is different.

You need to be very disciplined in making your payments. Your current loan is likely an installment loan, which means a set amount is due every month to pay off the loan in a certain period of time.

Credit cards are revolving, which means it will take you longer to pay off your balance if you only pay the minimum each month as interest continues to accrue. Obviously, this is the perk of the 0% APR balance transfer; all your money is paying down principal. Know what you need to pay each month to pay off the balance in full before the introductory 0% APR expires!

What to Watch Out for in the Process

Balance transfers might sound like a great solution, but they are not for everyone. We mentioned this before, but you should only consider doing this if you know without a doubt that you can pay off the balance in full by the end of the 0% APR period.

Why? Credit cards still have very high interest rates. If you don’t pay off the balance, then you’ll start accruing interest at the regular APR for your credit card. These can be as high as 11% to 15% – not what you want to deal with, especially if your original loan had a lower APR.

Also, depending on the card, if you miss a payment, your 0% APR may expire as a penalty. It’s extremely important to keep on top of your payments.

[Balance Transfer Traps to Avoid]

You should only be using this strategy if getting out of debt – for good – is your goal.

The other thing you must watch out for is the terms of the balance transfer, especially if you’re using a balance transfer check. Do not confuse a balance transfer offer with a cash advance offer. There are times credit card companies will send out blank checks for both in the same envelope. You have to read the fine print on the check. The last thing you want to do is take out a cash advance because those have higher rates.

You also need to watch out for balance transfer fees (typically around 3% of the balance you wish to transfer), which may be capped at a certain dollar amount. You should do the math before deciding a balance transfer is right for you.

Lastly, we want to repeat that this strategy is not for everyone, especially for those who haven’t been responsible with credit in the past. You should not add any additional debt onto this balance transfer card – you should only use it to transfer your existing debt. Otherwise, the balance will be more difficult to pay off.

Credit card companies bet on this happening, which is why they’re able to offer the 0% APR balance transfer in the first place – they make money off of the offers. Keep in mind that on most cards, new purchases aren’t covered under the 0% APR offer – they accrue at regular (high) rates. Read the fine print!

Parting Advice

Using a balance transfer check is one way to get around not being able to pay off a student or personal loan with a credit card, but you must be 100% aware of the terms and how the math works.

Don’t be afraid to call up the credit card company presenting you with the 0% APR offer to get clarification on what is or isn’t allowed with the balance transfer. If your credit isn’t sufficient, you may not be approved for a credit line that will allow you to transfer over all your debt. You may only be able to transfer over a portion.

If getting out of debt quickly is your goal, and you don’t qualify for a balance transfer (or a check won’t work out for you), then consider making extra payments on your debt. You’ll still save on interest, and you won’t have to worry about fees or having your payments denied.

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