Pay off student loans with home equity loan?

[kballgetlost]

I'm pretty new to financial matters and understanding loans, but I've been pretty mustachian in terms of frugality for quite awhile! Just looking for some advice on how to pay down my ridiculous student loans.

Background: 25 years old, no undergrad loans, two years of grad school (I'm a physician assistant) set me back 110K. I have mixed stafford and grad plus loans. Interest rates are between 6.8 to 8.5 (yikes!). My yearly income is ~89K. I bought my first house in Sept. and my interest on my mortgage is 4.5%. I've been able to pay almost double my loan amount each month but the interest is ridiuclous. Sallie Mae is not offering any loan consolidation at this time.

So my question is could I take out a home equity loan to pay off my student loans and then just pay down the home equity loan each month which would have a much lower interest rate? Do I even qualify for a home equity loan at this point since I'm a fairly new homeowner? Any other suggestions on how to quickly pay off the student loan or at least get a lower interest rate through some other sort of loan? Thanks in advance.

[arebelspy]

I bought my first house in Sept. and my interest on my mortgage is 4.5%...Do I even qualify for a home equity loan at this point since I'm a fairly new homeowner?

Probably not.  Ignoring the fact that most lenders want 6 mo. to a year seasoning on title before they'll lend against a property, 5 months in you likely don't have a lot of equity.  Most HELOCs only go like 70-80% LTV, meaning you'd have to have put down over a 30% down payment.  If, for some crazy reason, you put 50% down, then you could try to refi or HELOC to pull some of that equity out to pay down the student loans, but I'm doubting that's the case.

I bought my first house in Sept. and my interest on my mortgage is 4.5%...Do I even qualify for a home equity loan at this point since I'm a fairly new homeowner?

Zero interest credit card transfers.  It's a dangerous game, but if you have the discipline, it can be worthwhile.

[kballgetlost]

Thanks for the help. I looked at zero interest credit cards, but Sallie Mae only lets you pay the monthly amount due with a credit card. You can't pay a larger sum. Cash advances would work but most of them now have associated fees.

[arebelspy]

Thanks for the help. I looked at zero interest credit cards, but Sallie Mae only lets you pay the monthly amount due with a credit card. You can't pay a larger sum. Cash advances would work but most of them now have associated fees.

Yeah, you don't pay with a credit card for a balance transfer.

Step 1: Transfer from one card you already have (which has little to no balance) to another (which is offering the 0% balance transfer). 

Step 2: Card #1 now has a huge negative balance (cause it basically got a giant over payment).  Call them, ask them to refund you the over payment.  They will send a check.  I have done this at least 5 or 6 times with various financial institutions.  They all do it, they have to (it's your money).  Card #2 has a huge balance (that you just transferred to it).  Make sure you pay the minimum every month and save up enough to pay it off when it comes due.

Step 3: Cash check from bank, send giant amount to student loans.

Use with caution, for advanced Mustachians only.

[sol]

Why not just stop overpaying the low-interest mortgage payment and instead devote that money to the high-interest student loan debt?

I'm not sure why anyone would make double payments on 4.5% while making the minimum on 8%.

Taking out a home equity line of credit is probably only useful if your home value had increased dramatically since you bought the place six months ago, which seems unlikely.  Otherwise you're only reclaiming a portion of the principle you've paid into your mortgage, which is money that could have gone directly to the 8% loan in the first place.

[Early FI]

I agree that 0% credit card offers are one option, but right now it is very hard to find 0% offers with no fee -- typical offers right now include fees for 1% to 4% of the balance transferred. 

One option would be to get a card that has 0% APR on purchases for 12-18 months.  If you put all your regular purchases on the card, you can let the balance accumulate for 15 months while paying only the minimum payment.  Instead of paying the card off now, you can divert your cash toward your student loans and pay them down quicker.  Then when the balance comes due, you will (hopefully) pay off your 15 months of cumulative purchases all at once.

An example card for this is the Chase Slate:  https://creditcards.chase.com/credit-cards/slate.aspx

[arebelspy]

I agree that 0% credit card offers are one option, but right now it is very hard to find 0% offers with no fee -- typical offers right now include fees for 1% to 4% of the balance transferred. 

Good point, always check that there is no balance transfer fee.  I usually see them with 3% balance transfer fee.  However the 0% ones are starting to come back up, I hadn't seen any for a few years (09-11 or so), but have gotten multiple in the last 6 months.

I do like your second idea, as 0% APR on purchases is much, much easier to find (but harder to take advantage of, since I only spend a few thousand a month, but can balance transfer 10-15k in one chunk), but it's a good way for most people to take small advantage of the idea.

[MEJG]

Sorry for the momentary high jack :-)

I just acquired the Chase freedom card and have 0% until June 2013.  I am planning on using it for my student loans, like described.  What I can't figure out is the best way to use it.

It has 1% cash back on everything, and 5% on rotating categories.  So I would like to use it for monthly purchases too.  Would you:

1)  put a large ($7-8,000) student loan payment, use the $2-3000 remaining credit for monthly purchases and the pay down the balance quickly? and then re-charge the chunk of student loan debt? rinse and repeat until June 2013

2) Put $9,000 of the student loan on the card, leaving $1,000 for monthly purchases and just pay it off slowly, on schedule for paying off completely in March 2013 and throw money at the student loans?

[kballgetlost]

Why not just stop overpaying the low-interest mortgage payment and instead devote that money to the high-interest student loan debt?

I'm not overpaying the mortgage, I'm paying the minimum. I'm overpaying the loans at the 8.5% rate each month. Sorry for the confusion.

Thanks for the help. I looked at zero interest credit cards, but Sallie Mae only lets you pay the monthly amount due with a credit card. You can't pay a larger sum. Cash advances would work but most of them now have associated fees.

Yeah, you don't pay with a credit card for a balance transfer.

Step 1: Transfer from one card you already have (which has little to no balance) to another (which is offering the 0% balance transfer). 

Step 2: Card #1 now has a huge negative balance (cause it basically got a giant over payment).  Call them, ask them to refund you the over payment.  They will send a check.  I have done this at least 5 or 6 times with various financial institutions.  They all do it, they have to (it's your money).  Card #2 has a huge balance (that you just transferred to it).  Make sure you pay the minimum every month and save up enough to pay it off when it comes due.

Step 3: Cash check from bank, send giant amount to student loans.

Use with caution, for advanced Mustachians only.

This sounds like a good option in theory, but I want to make sure I understand correctly. Ok so card number 1 has little to no balance...how much can you transfer? I'm assuming only your credit limit? I think I understand the rest of it, but I'm not sure about the initial transfer. Thanks for the help!

[arebelspy]

This sounds like a good option in theory, but I want to make sure I understand correctly. Ok so card number 1 has little to no balance...how much can you transfer? I'm assuming only your credit limit? I think I understand the rest of it, but I'm not sure about the initial transfer. Thanks for the help!

As much as card #2 will let you.  There is no "credit limit" on a payment.

So say card #1 has little no no balance.  Card 2 (you're opening) will give you a 12k limit, but only let you transfer 11,500 (they typically want you to leave a small bit open, hoping you'll purchase something on this card - do not do it).  You transfer the balance of 11,500 from card 1 to card 2.  Card 2 has no idea what the balance of card 1 is.  Card one suddenly gets a huge negative balance from the overpayment, you call them and they send you a check.

/Have done it with B of A, Chase, and Amex, multiple times.