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Should You Pay Off Student Loans With Credit Cards?

DiceHe knew he wasn’t going to be able to wipe out his student loans in bankruptcy, so he had a better idea. Or did he?

Most people with student loan debt know they can’t wipe out their student loan debts in bankruptcy without jumping through hoops like a circus animal.

They also know that credit card debt can be wiped out in Chapter 7 bankruptcy, or effectively settled in a Chapter 13 reorganization bankruptcy.

Some folks get into their heads that they should pay off their student loans with a credit card, wait awhile, then file for bankruptcy.

That’s where things get tricky.

Educational Benefits, Not Student Loans

Under the U.S. Bankruptcy Code, you can’t discharge a debt for either of the following without a showing of undue hardship:

  • an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution;
  • an obligation to repay funds received as an educational benefit, scholarship, or stipend; or
  • any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

Notice that we’re not talking about student loans; rather, the exception to discharge is for educational benefits OR student loans. True, most educational benefit loans and overpayments are the same as student loans – but not all of them.

To uncover the true definition of what’s excepted from discharge, we need to look to the Internal Revenue Code, which says:

The term “qualified education loan” means any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses—
(A) which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,
(B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and
(C) which are attributable to education furnished during a period during which the recipient was an eligible student.

Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan. The term “qualified education loan” shall not include any indebtedness owed to a person who is related (within the meaning of section 267 (b) or 707 (b)(1)) to the taxpayer or to any person by reason of a loan under any qualified employer plan (as defined in section 72 (p)(4)) or under any contract referred to in section 72 (p)(5).

So there you have it – the term is defined as any indebtedness, not merely a loan termed as a student loan.

Credit Card Debt As Educational Benefit Loan

If you look at the Internal Revenue Code, you’ll note that the qualified education loan incorporates any refinancing of a student loan. When you pay off a student loan with a credit card, you’re refinancing the student loan – trading debt for debt.

Given that, there’s a good argument to be made that when you pay your student loans with a credit card you’re just changing the platform rather than the character of the debt. In other words, what was nondischargeable remains so.

More Hurdles

Under the U.S. Bankruptcy Code, some charges made in the run-up to filing for bankruptcy can be considered to have been incurred without the intent or ability to repay. Those charges may not be discharged in your bankruptcy case, either.

If you figured you’d get smart and pay off your student loans with credit card cards, that may be an additional consideration.

What Are The Odds?

Personally, I’ve never seen a credit card company go through the old records and make this sort of argument. Perhaps it’s happened but not to my knowledge.

Chances are good that if you make a payment or two on your student loans using a credit card, you’re not going to land in hot water so long as you make those credit card payments for long enough. You want to put some distance between the payment and your bankruptcy filing, but even if there’s a problem with wiping out those payments it’s not likely to be a large debt to contend with later on.

As for paying off the entire student loan on a credit card, I don’t think I’d recommend it.

Which Leads Us To The Downside

If you repay your student loan with your credit card, there’s a chance that the creditor will ask the court for that debt to follow you after bankruptcy.

If the credit card carries a lower interest rate than the original student loan, that may not be a terrible outcome. But if the credit card charges more interest than the student loan, you may be putting yourself in a far worse situation by refinancing the loan.

Think of it as a game of chess, requiring you to figure out your options before it’s too late. You’ve got options now, but it’s tough to make right a wrong move.

Photo by Miss Turner

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By |April 18th, 2013|

About the Author:

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.
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