When you’re desperately searching for ways to pay for college, and student loan debt terrifies you, you can resort to some pretty crazy thinking. Yet, just about any method which does not involve paying off the debt with your hard-earned cash is likely to construe some form of student loan fraud.
What Is Student Loan Fraud?
A student loan is a large financial burden – one that young adults are often forced to take on if they want a higher education.
While in dollar amounts, a home mortgage may compare, there aren’t many individuals thinking about taking out a mortgage to purchase a house soon after getting a high school diploma. On the other hand, with rising college costs, many eighteen and nineteen-year-olds graduating high school are faced with the choice of taking out student loans or not attending their preferred higher-education institution (or any university at all).
Additionally, most college-aged young adults simply haven’t had enough life and financial experience to understand the responsibility they are taking on when they take out a student loan. Unfortunately, the barriers to getting such large loans aren’t difficult to overcome; indubitably, this leads many doe-eyed teenagers to sign their name without knowing exactly what it is they are signing.
Fast-forward four years, once students have obtained a bachelor’s degree, and the time comes to start making payments on the loans they took on “all those years ago.” With many more life experiences under their belts, these ex-students begin to realize the seemingly insurmountable task that is paying off tens or even hundreds of thousands of dollars in student loans.
Finding themselves with this problem, those persons responsible for paying off student loans may begin to consider some less-than-legal methods for getting rid of the financial weight. Bankruptcy seems like the simple path, yet most students know that student loan debt cannot be discharged in bankruptcy filings except in extraordinary situations. Alternatively, many do know that credit card debt is one of the types of debt most often wiped in a bankruptcy process. This knowledge makes it tempting to turn to credit cards to pay for tuition while never intending on paying the cards off.
There are a number of flaws in this poorly-concocted (and illegal) theory which will be explored below. Most importantly, understand that you will likely get caught, certainly ruin your credit, have to pay off the credit cards anyway, and even go to jail.
Tuition Credit Card Fraud
First and foremost, most colleges and universities will not accept credit cards as a form of payment.
Therefore, to use a credit card to pay off your tuition, you have to take out cash advances on your card. These advances usually incur an additional fee for each advance. Even worse, such cash advances are usually charged at a higher rate than regular credit card 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. Credit cards 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.
If nothing else on this page deters you, you should be cognizant of the fact that debt collectors are already privy to these strategies and, in most cases, they will “chase down” your credit card charges and tie them to your tuition payments.
Student Loan Debt & Bankruptcy
Student loan debt still has the same status; it’s 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. As you should know, fraud is a crime that can easily land you in 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.