When you are desperately searching for ways to pay for college, and student loan debt terrifies you, you can resort to some pretty crazy thinking. Most students hear that student loan debt cannot be discharged in bankruptcy filings, except in extraordinary situations. This knowledge makes it tempting to turn to credit cards to pay for tuition, sometimes knowingly never planning to pay the cards off. There are a number of flaws in this theory, which will be explored below. You can also get caught, ruin your credit, have to pay off the credit cards anyway, and even go to jail.
Tuition Credit Card Fraud
Most colleges and universities will not accept credit cards as a form of payment. Therefore, to use credit cards you have to take out cash advances that include fees with each advance, and advances are also usually charged at a higher rate than regular purchases. Also, opening up a lot of credit cards before you graduate will decrease your credit score, as you will most likely have several accounts and a high debt ratio, both of which significantly impact your score.
Using Bankruptcy As A Payment Strategy
It is hard to believe that anyone would purposely choose bankruptcy as a strategy to get out of paying off tuition transferred to credit cards. Even sadder, it doesn’t work.
This ‘brilliant’ plan aims to take advantage of the fact that while student loans are not written off with other debt during Chapter 7 bankruptcy filing, credit card debt usually is. It can happen, but not if debt collectors follow your charges and tie them to your tuition payments, which is what usually happens. Credit cards do get discharged in Chapter 7 all the time. So, just move the debt to credit cards and make it disappear, right? No, that’s a bad idea.
Student Loan Debt And Bankruptcy
Student loan debt still has the same status, it is exempt from bankruptcy debt forgiveness, even if you put it on a credit card. So, if you file for Chapter 7 protection, the lender will likely take you to court to prove that you committed fraud and you will end up paying back the loans anyway and possibly the lender’s legal fees related to the case.
If the credit card lenders realize what you are doing and can prove it, it is considered fraud. In which case, you can go to prison. The credit card company would have to be on to you and decide to take legal action, and they would have to prove intent. So, if you truly thought putting student loans on credit cards would facilitate the management of your debt and intended to pay it off, you could avoid fraud charges. Typically, courts decide based on the interest rates you paid before and after the transfer. Furthermore, close scrutiny is given to any marketing from the credit card company mentioning student loans.
One red flag is moving student loans to a credit card that has a higher interest rate. This would hurt your precarious financial standing even more. This could convince the court that you were knowingly committing fraud. However, if you moved student loan balances to a lower interest rate credit card and consistently made payments, your case looks more believable. It is possible that you could become ill or you lose your job and are not be able to pay down your debt, as it can happen in many bankruptcy cases.
If a credit card company has a history of encouraging clients to use a credit card to pay off student loans, it will be very difficult for them to win against students filing to discharge credit card debt in a bankruptcy filing. However, using this strategy is never recommended.