Smart SpendingSmart Spending

Pay down student loans -- by shopping?

A new debit card offers rewards that can be applied to student loan debt. Consumer advocates urge caution.

By MSN Money Partner Apr 6, 2012 1:24PM

This post comes from AnnaMaria Andriotis at partner site SmartMoney.


SmartMoney on MSN MoneyCollege graduates can now pay off their student loans by paying their bar tabs. That's the marketing pitch for a debit card aimed at those saddled with loan debt.


Image: Graduation cap (© Brand X Pictures/Photolibrary/PHOTOLIBRARY GROUP LTD)But borrowers should tread lightly: They'll have to spend a lot on clothing and nightlife before seeing any meaningful rewards, experts say. They also may incur high fees.


Launched this week, the so-called SmarterBank Visa debit card offers graduates rewards of up to 1% on purchases, which are put toward their student loan balances. The size of those rewards will depend on several factors, including the purchases a cardholder makes -- the more they swipe for, the more they can earn in rewards -- and whether they incur one of the 20 or so fees the card -- or the checking account it's tied to -- charges.


The card was launched by, a student loan comparison company whose executives include former student loan lenders. (Post continues below.)

Though the first student loan debit card, it's not the first product aimed at students sinking deeper into debt. The Upromise credit card, for instance, offers at least 1% back on all purchases, which cardholders can use to pay down their student loans. And more will likely roll out as student debt grows, says John Ulzheimer, the president of consumer education at, a credit monitoring site.


Roughly 37 million Americans have outstanding student loans, according to Last year, 66% -- or 1.8 million -- of bachelor's degree recipients had student loans -- a figure that's expected to rise.


Here's how the card works: Cardholders get 0.5% rewards for signature-based purchases of up to $100 and 1% on anything over that amount. (Regular debit card programs offer 0.5% on average in rewards, according to To earn enough rewards to make a dent in their student loan balance, cardholders will need to spend -- a lot.


Someone who swipes for $1,000 in purchases per month can get up to $10 in monthly rewards. The company says those rewards can lead to real savings: If applied to a 10-year loan of $8,500 at 6.8% interest, it could help a borrower repay that debt 16 months faster and save up to $1,500. But for the roughly two-thirds of students who graduate college with loans, which are projected to average $28,700 this year, earning $10 a month in rewards will shave just five months off their repayment period.


There are also fees. Cardholders will incur a $2 fee if they use an ATM outside the card's network, while the average out-of-network fee is $1.41, according to Checking account fees include a $5 fee to get a copy of their statement and a "research fee" of $25 per hour if the cardholder wants the bank to review their account -- something many banks don't charge for, says Ulzheimer.

Some of the fees are no higher than the industry average, says Greg McBride, senior financial analyst at Bankrate. For instance, there's a $25 charge for insufficient funds, when the cardholder withdraws more money from their checking account than they have. The average fee is $30.83, McBride says.


Consumer advocates say the idea of spending to save on student loans doesn't make sense. "They're using the flashy reward of paying your loans faster by spending more money, which is counterintuitive," says Rich Williams, a higher education advocate with U.S. PIRG.


For its part, says that the fees don't impact the rate at which rewards are earned. The company says the SmarterBank debit card can be used in conjunction with borrowers' overall plan to pay down their student loan debt. "They can get ahead and pay it down faster rather than carry it for 20 years," says co-founder Patrick Kandianis.


Consumers who'd like to use earn rewards to pay down their student loan debt can consider alternative options. Community banks and credit unions tend to offer free debit cards, which also often have rewards.


Another option is using credit cards, as fees have been dropping and rewards have been rising. Consumers who avoid interest charges by paying their balance in full could potentially earn more in rewards than they would with a debit card.


More on SmartMoney and MSN Money:


Apr 8, 2012 11:01AM
That's a recipe for having not just student loan debt but also credit card debt!, just don't spend money on things you do not NEED and pay off the loan.
Apr 6, 2012 2:12PM
Interesting article. As a student I would recommend if you need help learning about college financial aid.
Jul 22, 2012 2:44PM
What a load of crap. Just take the money you would spend with that card and apply it directly to the loan.
Apr 6, 2012 8:47PM

I just graduated, and I figured out how to save money with TIME TRAVEL. Seriously though, that's kind of what happened when I lost my debit card. Here's an explanation: http:// yhoo. it/SavingMoneyWithTimeTravel

Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.