These credit cards can help you pay down student debt with rewards

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

Currently, the average student debt is around $37,787, according to the Education Data Initiative, while the average student loan monthly payment is an estimated $460. That sum could easily be half of monthly housing costs in the right location, a car payment or a healthy amount to add to savings. Yet millennials and Gen Zers have to put it toward paying off their student loans, a long and exhausting financial commitment.

If that describes your situation, it’s no wonder you may want to get out of student debt as soon as possible, directing additional resources to pay it down. There are, in fact, a few credit cards on the market that offer extra rewards toward your student loan payments. They can be one tool to help you reduce your student loan balance quicker. Let’s take a closer look at them.

When should you pay student loans with a credit card?

In general, you cannot use a credit card to pay the lender of your student loan, whether it’s the government or private institution, directly. However, there are some ways you can use credit cards to your advantage when it comes to your student debt.

If your student loan carries a variable interest rate

With the Fed continuing to hike up interest rates, the variable interest rate on your student loan seems likely to increase as well. Since variable interest rates depend on market conditions, you could end up paying more in interest than you normally would.

So, if you’re about to graduate and a portion of your student loan carries a variable interest rate, you may want to transfer your debt to a balance transfer credit card with a 0 percent intro APR offer. The best balance transfer cards usually provide zero interest for 15 to 21 months. Be sure that you can pay off your debt in that time period, or else you’ll end up paying even more in interest, with credit card interest rates way higher than those on 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, usually 3 percent to 5 percent. Plus, if you have a federal loan and you transfer your student debt to a credit card, you forfeit any protections, like repayment plans and forgiveness programs.

If you pay your credit card in full and on time

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

Some credit cards offer rewards that can be redeemed for cash back toward student loan payments. Others offer cash back or points, which you can redeem as cash or direct deposit, then use those rewards for your student loan payments. Keep in mind that receiving your rewards depends on you paying at least the minimum payment, preferably the full balance, on time every month. Some card issuers won’t post your rewards if you miss payments.

Using a credit card to pay your student debt is best when you have the means to pay off your loan and simply want to get out of debt as quickly as possible. But if you don’t want to risk more debt and think you won’t be able to pay your credit card bill on time, it may be a better idea to pay your student loans with cash or check, the usual way.

Credit cards that reward student loan payments

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

Laurel Road Student Loan Cashback Card

The card earns 2 percent cash back when you redeem the rewards toward your student loans with most U.S. servicers (you can check the list of eligible servicers here). Alternatively, you can redeem 1 percent cash back toward anything else. It also offers an attractive sign-up bonus of $300 if you spend $3,000 in the first 90 days and charges no annual fee.

SoFi Credit Card

Though exclusive to cardholders with existing SoFi loans, the SoFi Credit Card* offers a solid rate of up to 3 percent cash back for a year when you set up a direct deposit with SoFi. After that you earn 2 percent cash back redeemable toward paying down SoFi student loans, among other options such as promotional offers through SoFi, savings or investments within a SoFi account and SoFi personal loans. You can also redeem for statement credits, but then your rewards lose half their value.

Sallie Mae Accelerate

Another great no-annual-fee option for consumers with Sallie Mae student loans, the Sallie Mae Accelerate card has a similar rewards structure to the Laurel Road Card. If you redeem your rewards to pay down a student loan (federal or private), you’ll receive 2 percent cash back. If you redeem for anything else, you’ll get 1.5 percent cash back. An added perk: You may claim up to $600 per claim in cell phone protection if you use your Sallie Mae card to pay your monthly cellphone bill.

Alternate credit cards good for student loans

As we previously mentioned, transferring your student loan to a balance transfer card is one option, albeit an aggressive one that you should choose only if you’re confident you can pay it all off before the intro APR period ends. A strong choice would be the Citi® Diamond Preferred® Card, which has a 0 percent intro APR offer on balance transfers for 21 months. After that your regular APR would increase to 17.74 percent to 28.49 percent variable.

Another option is to use a high-earning cash back card to rack up cash back, redeem those rewards for cash or direct deposit, and put those funds toward your student debt. One possibility is the Chase Freedom Unlimited®, which earns 5 percent cash back on Ultimate Rewards travel, 3 percent on dining and drugstore purchases and 1.5 percent on everything else. For an added bonus, it’ll earn an additional 1.5 percent cash back on everything (on up to $20,000) in your first year. With those rates, you’d be surprised how quickly your rewards can add up.

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

Are the rewards worth it?

With all that said, remember that student debt isn’t the most detrimental to your financial health. It can be a good idea to pay a bit extra toward your student loan when you can, especially if the interest rate is high. However, don’t feel too anxious about it if you’re working toward other financial goals.

If you’re determined to pay off your student loans as soon as possible, the rewards could contribute a decent amount to resolving your debt. For example, with the SoFi credit card, assuming you spent $15,900 in a year, you could earn $318 in cash back when redeeming for student loan payments (up to $477 if you set up direct deposit). That’s nothing to scoff at.

However, before you focus on directing every extra penny toward your student loan, you should think about other financial priorities that may be more important. Some things that come to mind are: paying off credit card debt, establishing an emergency fund and contributing to your 401(k). Once you have all of that going for you, and there’s still breathing room left in your budget, you can consider paying extra toward your student loan.

Bottom line

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

Of the cards available, you can go with one that rewards you for paying down your student debt, a balance transfer card or a cash back card. Of course, be sure to examine your finances and your goals when determining which one to choose.