Author Topic: Graduate Loan Arbitrage with a Bank?  (Read 4621 times)

simonsez

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Graduate Loan Arbitrage with a Bank?
« on: April 24, 2013, 12:52:29 PM »
My only real financial scourge in life are my school loans.  Specifically, some of my graduate school loans bother me the most because of their high interest rates.  The offending group are officially 7.9%, of which I pay them back at a 7.65% rated due to auto-debiting from my bank account but I digress.  I pay more than the minimum and all of those extra payments are directed at these higher interest loans.  In my opinion, I'm not that risky from the lending standpoint.  At least, not 7.9/7.65% risky.  I've made every payment on time in my life for my various credit accounts (school loans included) and keep a low debt utilization ratio.  Has anyone taken out private loans to pay down federal loans simply because the interest rates were lower and they could take advantage of it?  e.g. Did you take out a loan from a private lender at 5% and use it to pay down a 7.9% graduate school loan and essentially save 2.9% in interest payments?  Were there any unforeseen drawbacks?

For my specific situation, trading the owner of the loan wouldn't hamper my ability to still pay down my loans since such a high proportion of my payments are extra payments.  I currently owe $482 every month buy pay, on average, about $750 in extra payments in addition to the $482.  I'm guessing if I used a private loan, a portion of the $750 extra payments would just go to the private lender rather than to Uncle Sam.

So basically, has anyone has any success with banks wagering on them for interest that otherwise Uncle Sam is collecting?

I haven't called my bank, or any other private institution yet but wanted to get a pulse from those that have tried this path.

Thanks in advance.

Note: I'm talking about grad loans here specifically because they have the highest interest.  Obviously if I knew I could turn a 7.9% loan into a 4% loan and my non-grad loans current interest rate was higher than 4%, I would do the same with them eventually.

Fuzz

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Re: Graduate Loan Arbitrage with a Bank?
« Reply #1 on: April 26, 2013, 07:51:39 PM »
Please PM me if you find out something good, I'm in the same boat.

For a while, I think Wells Fargo was offering variable rate loans 3.5 percent above prime, which was around 3.25. So you'd cut your interest some, but it wouldn't be worth the risk IMO for just a percent or two. Check out their website, I may be off on the details. Also, when I looked at it, I couldn't figure out if that was for new student loan debt or if you could use it to pay off existing student loan debt. It wasn't much of a rate cut, so I abandoned the plan.

Here is one thing you could do. If you got the Chase Slate card with a 0 percent intro rate for 15 months you can transfer a balance with a 0 percent fee. They don't give you a check like some CC companies. So you have to somehow pay your student loan with a credit card to accrue the balance. Some credit cards will give you a check that draws against your credit limit with a 0 percent transaction fee but an immediate 15% interest fee, or whatever. The trick would be to write a check with that CC account and transfer it to Slate within before you accrue interest and then pay it off in 15 months. Ha! Take that Bankers!

Good luck

arebelspy

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Re: Graduate Loan Arbitrage with a Bank?
« Reply #2 on: April 26, 2013, 07:54:29 PM »
Here is one thing you could do. If you got the Chase Slate card with a 0 percent intro rate for 15 months you can transfer a balance with a 0 percent fee. They don't give you a check like some CC companies. So you have to somehow pay your student loan with a credit card to accrue the balance. Some credit cards will give you a check that draws against your credit limit with a 0 percent transaction fee but an immediate 15% interest fee, or whatever. The trick would be to write a check with that CC account and transfer it to Slate within before you accrue interest and then pay it off in 15 months. Ha! Take that Bankers!

My Slate card mails me balance transfer checks on occasion.  I have one sitting in front of me.
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secondcor521

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Re: Graduate Loan Arbitrage with a Bank?
« Reply #3 on: April 26, 2013, 10:16:27 PM »
OP, you may not think you're that risky, and maybe you aren't but you probably have a shorter track record.  I too have made all of my payments on time, but I've done so on maybe 5 different mortgages, ~50 credit cards, 1 student loan, 1 bank personal loan, and every single rent payment.  Over the past 26 years.

(The nice thing is, if you keep it up for another 20 years, you'll almost have bankers paying you to borrow money.)

That having been said, your idea is perfectly sound as long as you account for the following factors:

1.  You'll probably pay some sort of origination fee on the new loan, which will cut into your interest savings.  Probably 1% to 3%, depending on if you do a personal bank loan or a credit card.
2.  The payback term will most likely be shorter than your current loan, which will mean higher payments, which may not be a problem in your case since you're doing large additional payments already, but I would look at it as a little loss of flexibility in your financial arrangements.
3.  Deductibility of interest.  Student loan interest is often tax-deductible; a private loan would not be.
4.  Student loans often have some flexible payment features like forbearance and suspension and such.  Private loans and credit cards don't.  Again, probably just a flexibility-limiter here.

Overall, you'll probably find that you can save some money at the cost of flexibility.  Were I in your shoes I'd probably make the trade, especially if I could get a zero fee balance transfer to a credit card.  But that's for you to decide.  Good luck.

(In fact, I did something similar -- had both the option to take student loans to pay for my schooling and then had scholarship help, so I used the student loans to pay for school at 0% interest while in school then something ridiculous like 2.9% fixed at graduation, and used the scholarship funds to pay down my mortgage which was at ~7% at the time.  Another time I borrowed about $500K on zero percent credit cards for a year and was earning more interest than I was paying on my mortgage for about a year.  So things like this can be done and are worth your while if you can pull them off.)

Joel

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Re: Graduate Loan Arbitrage with a Bank?
« Reply #4 on: April 27, 2013, 12:25:21 AM »
I don't see why this isnt a good deal. If a bank will loan you money uncollateralized at a rate lower than you are paying on your student loans. Why not?

I say to go for it.

Balance transfer fees are 3% upfront of the entire balance. Do the math, that could be much higher than an aggressive paydown schedule with your debt at its current ~7% APY, because ~7% APY is less than 1% per month.

mlipps

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Re: Graduate Loan Arbitrage with a Bank?
« Reply #5 on: April 27, 2013, 08:23:08 AM »
Actually, the loan interest is still deductible. Read the IRS pub; if you use a credit card only to pay for your books (because you're an idiot), that interest is deductible. If you take out a HELOC and use it only to pay for your child's living expenses while in college, that interest is deductible. (Above the line, as opposed to having to itemize like you normally would for mortgage interest). As long as you can show the paper trail in case of an audit, I can't see why you wouldn't be allowed to deduct the interest if you transfer the balance.

Also, PenFed has revived an old offer of theirs where you get no balance transfer fee and 4.99% for the life of the balance. I read about it yesterday on FatWallet.

arebelspy

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Re: Graduate Loan Arbitrage with a Bank?
« Reply #6 on: April 27, 2013, 08:30:40 AM »
Also, PenFed has revived an old offer of theirs where you get no balance transfer fee and 4.99% for the life of the balance. I read about it yesterday on FatWallet.

Interesting.  What's the limit?  Do you have a link on the PenFed site?
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mlipps

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Re: Graduate Loan Arbitrage with a Bank?
« Reply #7 on: April 27, 2013, 10:17:26 AM »
Also, PenFed has revived an old offer of theirs where you get no balance transfer fee and 4.99% for the life of the balance. I read about it yesterday on FatWallet.

Interesting.  What's the limit?  Do you have a link on the PenFed site?

Here's the full thread on FW: http://www.fatwallet.com/forums/finance/1265328/

secondcor521

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Re: Graduate Loan Arbitrage with a Bank?
« Reply #8 on: April 27, 2013, 10:20:30 AM »
@mlipps -- good to know, I didn't know that.  Thanks!

@ars -- if you have a credit card at PenFed, just log into your account and you'll see an ad right on the accounts page with the offer.