Author Topic: 0% Interest on Student Loan? Help me understand the math!  (Read 6278 times)

Lis

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0% Interest on Student Loan? Help me understand the math!
« on: September 05, 2014, 09:41:28 AM »
I currently have a student loan with Sallie Mae with an interest rate of 6.75%. My most recent payment just went through, and until my next payment, I will be paying $1.92 a day for the privilege of carrying this loan. With my payments, it seems to decrease ~ $0.07-$0.10 a day each month.

Let me start off by saying that words cannot express how much I hate Sallie Mae. Their customer service is atrocious... there have been multiple mistakes made in my account. I've called and received different answers from different people, been talked in circles, been offered various services by pushy sales people that I've repeatedly turned down... anyway... /rant done.

There are similar posts on this site and others that have given me ideas, and I'm sorry if this seems like a redundant post, but I'm hoping that you can tell me that "yes, this is a good idea for you, good luck!" or "no, terrible, suck it up and stick with Sallie Mae."

The idea is transfer the remaining balance of my loan to a 0% interest credit card (for several months). There are various fees involved, of course, and taking that into consideration, I'm wondering if it's worth it...

I would get a 0% interest free credit card for 15 months. Currently, I put a 'minimum' of $500 towards my student loans, so putting aside $500 for a credit card would not be a challenge. Typically I pay more a month, but $500 is definitely doable so I'll stick with that.

15*500 = $7500... so at most, I'd like to have a $7500 balance on this new card.

Most of the cards I'm looking at have a 3% transfer balance, so...

7500/1.03 = 7281.55

Sallie Mae has yet to answer me what the credit card convenience fee would be, but I've come across third party websites saying it's either 2.5% or 2.75%. So taking that into consideration...

7281.55/1.025 = 7103.95
7281.55/1.0275 = 7086.67

So I'd have to wait for my balance to drop to either number above to do this. In either case, I'd be paying ~$400 to not pay interest anymore (and to get rid of Sallie Mae!!!)

Some final thoughts and questions...

- Does my math above make sense? Or did I miss something?
- Yes, student loan paid interest is tax deductible. To be perfectly honest, I'd rather get rid of Sallie Mae than have it as a tax deduction, so this is of low importance to me.
- Credit card interest would likely jump up to anywhere between 14%-23%, clearly much higher than the 6.75% I'm paying now. I am not planning on carrying a balance on this card - ever. That's why $500 a month ($7500 total balance) was chosen. Each paycheck I automatically set aside $250 to put towards student loans, and any extra money I have from staying under budget, side gigs, etc., goes in additionally.
- If it matters, my current balance on SL is ~$10.3k. If I follow through with this plan, it would be probably in March/April, after my tax return (which will be put towards the loan!). Last year my total tax return was $2.3k (and I haven't changed my numbers yet... I know, I know, facepunches all around).
- I would make this student loan 'purchase' on my current Visa card, but I'd have to ask for a credit card increase (it's a card I don't use regularly. Current limit is $2.4k... it was my college credit card with a measly $900 limit that they increased without me asking once I got a job and income). Would it make more sense to find a 0% interest free for purchases card instead?
- None of this will be eligible for credit card points/cash back/ rewards. I'm okay with this.
- This MUST be paid off in 15 months, I'd be shooting for 12!
- As a newbie to financial life, I am curious what this would do to my credit score. I'm currently at about ~750 (according to creditkarma) with a short credit history being the most detrimental. I've never missed or made a late payment on anything. I'm not planning on purchasing a home or any major ticket item in the next 2-3 years. Could this still negatively impact me?

Ok, monster post is done. Thoughts? Critiques? Is this a viable option or am I looking for an easy way out?

acemanhattan

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Re: 0% Interest on Student Loan? Help me understand the math!
« Reply #1 on: September 05, 2014, 10:36:48 AM »
It sounds to me like you are exploring your options and trying to see if there is a better arrangement than the one you currently have.  Sometimes, as it happens, there is an “easy way out” but nobody gets points for making things harder on themselves so who cares if that is what you’ve found or are looking for.  The key is not to do anything that puts you in a worse situation and it sounds to me like this could be one of those situations. 

The first thing to note is that cards do exist that, as an introductory offer, will offer you something like 18-24 months no interest AND absolutely no fees for balance transfers. The offer you have (15 months with fees) sounds dreadfully inferior to that type of arrangement (for both reasons of fees and length of the loan); if this is something you genuinely are interested in pursuing (and it remains to be seen whether you should be) then you might consider trying to establish a relationship with a company that will give you better terms. 
The second thing to note is that if you don’t get a new card (but are able to get existing your credit line increased to an amount that makes your plan possible), then, unless you have some savings (or unless the line of credit is drastically increased), you will have left yourself no line of credit to serve as an emergency fund. In addition, I am of the understanding that regularly carrying a balance of over 30% of your available credit (or maybe it is 50%) does have an impact on your credit score—though of what kind I don’t know. You would be doing this for much of the 12-15 months so you should look into it.

The third and, perhaps, most important thing to note is that you seem to be putting a heck of a lot of value on alleviating yourself of the burden of Sallie Mae’s incompetence.  Is this justified?  Have you ever had an account balance of $10k with another lender?  If not, how do you know that the lender you go to will competently serve you? In addition you are ignoring what you will be losing by moving from Sallie Mae to a private company. I advise you to take a look at the following page http://go.salliemae.com/content/edServicing/federalLoans/in-repayment/having-trouble-making-payments.aspx and then see if you can get a guarantee that is even remotely similar from a private lender.  If you can’t, I think you should strongly consider the value of the “insurance policy” against the unknown that you have in doing business with Sallie Mae, because you will not have this flexibility with a private lender.   

I hope this has been helpful.

Cheddar Stacker

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Re: 0% Interest on Student Loan? Help me understand the math!
« Reply #2 on: September 05, 2014, 10:59:06 AM »
Why not just get the card, charge your regular monthly expenses to it to earn the rewards and avoid the processing fees charged on paying Sallie with a card, then don't pay the monthly bill at all and instead pay all of that towards Sallie?

More complicated, slower transfer of the outstanding debt, less time with the full amount on the 0% interest, but you are saving a ton of transfer fees while earning 1% cash back (maybe) on the $7,500 in purchases.

I would keep a spreadsheet detailing all of this. Don't purchase more than you otherwise would have. Try paying as many bills as possible with the new card (i.e.-utilities, rent, mortgage, whatever is possible) to get up to the $7,500 as quickly as possible.

Also, as ace said, make sure you find the absolute best card you can. I wouldn't worry about what it does to your credit score. 750 is fine, and this may not have any real effect. If it does, it would be insignificant.

DangleStash

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Re: 0% Interest on Student Loan? Help me understand the math!
« Reply #3 on: September 05, 2014, 11:07:11 AM »
Why not just get the card, charge your regular monthly expenses to it to earn the rewards and avoid the processing fees charged on paying Sallie with a card, then don't pay the monthly bill at all and instead pay all of that towards Sallie?

More complicated, slower transfer of the outstanding debt, less time with the full amount on the 0% interest, but you are saving a ton of transfer fees while earning 1% cash back (maybe) on the $7,500 in purchases.

I would keep a spreadsheet detailing all of this. Don't purchase more than you otherwise would have. Try paying as many bills as possible with the new card (i.e.-utilities, rent, mortgage, whatever is possible) to get up to the $7,500 as quickly as possible.

Also, as ace said, make sure you find the absolute best card you can. I wouldn't worry about what it does to your credit score. 750 is fine, and this may not have any real effect. If it does, it would be insignificant.

I second this, and it's basically what I did.  Just make sure that you keep your spending in check.  Anticipating an ever-growing balance on a card can make it easy to splurge a bit here and there, then not be as concerned about the skyrocketing balance.

Lis

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Re: 0% Interest on Student Loan? Help me understand the math!
« Reply #4 on: September 05, 2014, 12:21:36 PM »
Why not just get the card, charge your regular monthly expenses to it to earn the rewards and avoid the processing fees charged on paying Sallie with a card, then don't pay the monthly bill at all and instead pay all of that towards Sallie?

More complicated, slower transfer of the outstanding debt, less time with the full amount on the 0% interest, but you are saving a ton of transfer fees while earning 1% cash back (maybe) on the $7,500 in purchases.

I would keep a spreadsheet detailing all of this. Don't purchase more than you otherwise would have. Try paying as many bills as possible with the new card (i.e.-utilities, rent, mortgage, whatever is possible) to get up to the $7,500 as quickly as possible.

Also, as ace said, make sure you find the absolute best card you can. I wouldn't worry about what it does to your credit score. 750 is fine, and this may not have any real effect. If it does, it would be insignificant.

I second this, and it's basically what I did.  Just make sure that you keep your spending in check.  Anticipating an ever-growing balance on a card can make it easy to splurge a bit here and there, then not be as concerned about the skyrocketing balance.

To be 100%, this idea terrifies me. Paying off an already incurred balance one chunk at a time is something I know I can do, but paying off one debt while starting another... I'm not sure I can handle that without the temptation of spending more becoming too much.

I used my old notes... not sure why I used 15 months when I had a newer set of notes set out for 18 months. But I've seen 18 months with 3% interest, and have found one 15 months with 0%. I haven't seen one 18-24 months with 0%. Any recommendations?

I have a three month emergency fund that, if I suddenly lose my job tomorrow, I could use. These are split between a 'high interest' savings account and some 1-5 year CDs. I also have family near by if it comes to that. That's a true emergency back up plan. I do have an AMEX card to fall back on as well that I don't have plans to use at all in this process.

I've never held such a large balance before with any other company, but any time I've reached out to my banks or credit card companies for help of some sort and I've always had people bending over backwards to help me. I call Sallie Mae with a simple question about when my autodebit will kick in and I get hung up on.

Clearly I'm not that experienced, but do you think if I reach out to Bank of America or AMEX (two companies I've been a customer with for the longest), they would modify the terms of a card for me? Increase the amount of months, decrease the transfer fee, etc.?

Angie55

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Re: 0% Interest on Student Loan? Help me understand the math!
« Reply #5 on: September 05, 2014, 12:26:50 PM »
I did this in a slightly modified way and for way more money. It worked out in the end but was pretty nervewracking in case it didn't. You have to be really detailed, have separate savings account for the money you're setting aside, and pay things a few days earlier so you can catch it in case something goes wrong and not get hit with a late fee. I had literally just started my job so I figured I wouldn't get laid off or fired in the 12 months before I needed it paid off!

Actually, now that I think about it I did it twice. Once for my car loan. And I DID lose my job the very month before it was due to be paid off... I had to beg my employer to let me stay on an extra month or two because I had $0 in my account. Miraculously they actually let me! Must have blocked that out of my mind.

That said, I wouldn't do it again. It only saved a few hundred dollars which would be wiped out instantly with one late payment or emergency expense. I felt more comfortable just paying down my loan as the money rolled in no matter what size. Some months I would have up to 20 payments ranging from $5 to $2000.

It surprisingly increased my credit score. I don't know how. But it did.
« Last Edit: September 05, 2014, 12:31:58 PM by Angie55 »

Fuzz

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Re: 0% Interest on Student Loan? Help me understand the math!
« Reply #6 on: September 05, 2014, 12:38:54 PM »
I did something like this, except I didn't pay the 3% cc fees. The chase slate card offered 12 or 15 months at 0 percent with no balance transfer fee. My regular credit card gave me a credit card check in the mail with no fee to use. So I wrote myself a check for $7000 on my regular credit card, paid my student loan, and then transferred the balance to the slate card without a fee. I took the approach of paying it off at 500/month, rather than save 500/month in a "high interest" account. Totally doable, but I think you should look around for a better CC deal.

 

Lis

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Re: 0% Interest on Student Loan? Help me understand the math!
« Reply #7 on: September 05, 2014, 01:21:06 PM »
My job is pretty secure... I can't see myself being let go in the next 12-18 months. It's also a job that I'm very happy with and have potential growth in, so I won't be looking to leave in that time period either. Then again, is anyone's job completely 100% secure?

Fuzz, I hadn't thought of getting a convenience check from a credit card. Looking now, most of the going rates for convenience checks are 3-5%. How'd you avoid that?

This is getting more and more complicated, I'm not sure it's worth it at this time. Ugh... I'll keep researching. But this is what I wanted! Other opinions and facts coming in, so thanks! Keep 'em coming!

acemanhattan

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Re: 0% Interest on Student Loan? Help me understand the math!
« Reply #8 on: September 05, 2014, 01:27:41 PM »
The check is how they allow you to transfer balances from somewhere else to them and usually comes when you sign up for with the kind of terms you want with a new company (I don't know if it typically says in the advertisement "and we give you a check!", though).  The student loan example is a perfect one since they don't typically let you just pay with a credit card.  by writing yourself a check for that amount (or to Sallie Mae) you avoid any convenience fee that Sallie Mae would charge you for using a credit card, so that is a plus.

MMM gives credit card recommendations on this page: http://www.mrmoneymustache.com/mmm-recommends/ read through the terms to see if they have anything that talks about balance transfers.

Jack

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Re: 0% Interest on Student Loan? Help me understand the math!
« Reply #9 on: September 05, 2014, 03:37:00 PM »
Why not just get the card, charge your regular monthly expenses to it to earn the rewards and avoid the processing fees charged on paying Sallie with a card, then don't pay the monthly bill at all and instead pay all of that towards Sallie?

This is exactly what I'm doing right now.

Cheddar Stacker

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Re: 0% Interest on Student Loan? Help me understand the math!
« Reply #10 on: September 05, 2014, 05:39:51 PM »
Why not just get the card, charge your regular monthly expenses to it to earn the rewards and avoid the processing fees charged on paying Sallie with a card, then don't pay the monthly bill at all and instead pay all of that towards Sallie?

This is exactly what I'm doing right now.

Cool. I'm just paying sallie slowly, but if/when I decide I'm ready to make 12-18 monthly payments to pay it off I think this is what I'll do.

Petunia 100

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Re: 0% Interest on Student Loan? Help me understand the math!
« Reply #11 on: September 05, 2014, 05:50:00 PM »
Why not just get the card, charge your regular monthly expenses to it to earn the rewards and avoid the processing fees charged on paying Sallie with a card, then don't pay the monthly bill at all and instead pay all of that towards Sallie?

Because in the meantime she is paying 6.75%.  Why not simply get a no fee balance transfer offer and stop paying 6.75% immediately?

Chase Slate is currently offering 0% for 15 months with no balance transfer fees.

https://creditcards.chase.com/credit-cards/slate.aspx

Sheesh, this is the second time today I have posted this link.  I don't get any kickbacks for referring new customers, I swear.  :)

The Fake Cheap

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Re: 0% Interest on Student Loan? Help me understand the math!
« Reply #12 on: September 05, 2014, 07:31:24 PM »

I recently completed paying off my student loan with a credit card.  My student loan interest rate was 5.5% and the promo rate on the credit card was 0.99% with the balance transfer fee waived.  The difference between you and I though is that I had been paying for years on my student loan, so I was at the tail end, and barring some super major financial catastrophe I made sure my credit card/student loan was due to be paid off by the end of the promo rate in six months.  I ended up saving about $100 on the interest.

Lis

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Re: 0% Interest on Student Loan? Help me understand the math!
« Reply #13 on: September 08, 2014, 09:48:23 AM »
So I heard back from Sallie Mae, and their convenience fee for paying by credit card isn't a percentage, it's only a flat fee of $14.95! That's a HUGE savings compared to 2.5 or 2.75%.

I had looked at the Chase Slate Card, thanks for the post Petunia! That's probably going to be the card I go with. My only concern is making sure the limit is enough. When I opened my AMEX they gave me a limit of $7500... if I call in to talk about the card is there a way for a sales rep to tell me what my limit would be before I signed up for it? If it ended up being... $6000, for example, I would have to wait a little bit before opening. (sorry if that's such a noobish question!)

Assuming this works out, I'd open the Chase card, charge $7500 on it (like a purchase - 0% on purchases for 15 months too!), and the total on the card would be $7515, easily taken care of in 15 months.

This is so exciting!!!
« Last Edit: September 08, 2014, 10:09:51 AM by Lis »

jat9449

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Re: 0% Interest on Student Loan? Help me understand the math!
« Reply #14 on: September 08, 2014, 09:54:34 AM »
We used the Slate card for something similar. When we applied for Slate the balance limit wasn't high enough. I had another Chase card I wasn't using and asked them to close the other account and combine the limit on that card with the new Slate card, which they easily did. If you have other Chase cards you should be able to do the same.

Angie55

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Re: 0% Interest on Student Loan? Help me understand the math!
« Reply #15 on: September 08, 2014, 11:09:17 AM »
That is awesome if its a flat fee. Wish I knew that before. I could have racked up some credit card rewards on my 2% cashback card.... Maybe if I start paying my loans off again.

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Re: 0% Interest on Student Loan? Help me understand the math!
« Reply #16 on: September 24, 2014, 05:03:12 PM »
So I heard back from Sallie Mae, and their convenience fee for paying by credit card isn't a percentage, it's only a flat fee of $14.95! That's a HUGE savings compared to 2.5 or 2.75%.

I had looked at the Chase Slate Card, thanks for the post Petunia! That's probably going to be the card I go with. My only concern is making sure the limit is enough. When I opened my AMEX they gave me a limit of $7500... if I call in to talk about the card is there a way for a sales rep to tell me what my limit would be before I signed up for it? If it ended up being... $6000, for example, I would have to wait a little bit before opening. (sorry if that's such a noobish question!)

Assuming this works out, I'd open the Chase card, charge $7500 on it (like a purchase - 0% on purchases for 15 months too!), and the total on the card would be $7515, easily taken care of in 15 months.

This is so exciting!!!

Watch you don't get slapped by a fee for going over your limit, even if you go over the limit because of one of the credit card company's own charges or the fee from Sallie Mae.

Goldielocks

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Re: 0% Interest on Student Loan? Help me understand the math!
« Reply #17 on: September 24, 2014, 06:50:32 PM »
If I read this right, you are offered 0% for 15 months and a 3% balance transfer (up front) fee, plus $14.95 Sallie Mae transfer fee.

Borrowing $7500.

Cost to you is 3% x 7500 + $14.95 = $239.95
The cost to you is actually more than 3%... it is on a declining balance after all.

$239.95  over 15 months, average balance is $3750 over the course of the year (it declines to zero so the average balance is half).
$239.95/$3750 / 15mos * 12 months/yr =  5.11% per annum

This is very close to your current interest rate.  Not worth it for the slight risk of having a huge one time payment or job loss or ?? in the next year that forces you into the unexpected.

Recommended
Wait for a 1% or lower transfer fee card, with 18 months or longer and 0% interest.  These and better offers do exist, but you need to wait and shop for them.

Lis

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Re: 0% Interest on Student Loan? Help me understand the math!
« Reply #18 on: September 25, 2014, 11:47:39 AM »
Goldie, sorry if I wasn't clear. The Slate card offers 0% on both transfers and purchases, so no 3% to worry about.

And Fake, I wouldn't charge over my limit. The $7515 figure came from assuming my limit would be greater. If my limit was less than that, I'd certainly keep it under.

I'm going to wait until my balance is closer to $7500 total then give Chase a call. I'm also going to leave ~$100 on my loan with Sallie Mae so they can autodebit and complete it. I don't want them to tack on an extra fee for completely paying off my balance with a CC. I noticed that they subtly attempted to avoid that aspect of my question.