Paying off student loans.. with a low interest rate credit card?

[misty1028]

Hello!

Big fan of the forum, but only from a distance. Now, I turn to a community I trust for some real-talk financial advice about the dreaded student loan.

Without going into detail about my naivety as an 18 yr old making the largest financial decision of her life, I just graduated and am sitting on $100k mostly private student loan. I graduated in 3 years, took out no other debt (credit card or otherwise) in college, but other than that made probably the stupidest decision of my whole life. (I'll do all the "you should have gone in state!" scolding myself.)

Instead of banging my head against a wall for all the things I could have done differently, I am now looking towards the future. I was lucky enough to secure a job (IRONICALLY in the financial services industry lolz) starting off making $40,500 a year at a great company. There is a lot of upward mobility, chances to take classes and exams to make myself more valuable / more money, etc.

So here I sit with this loan. I have a pretty good budget laid out for myself, averaging about $800 more a month than the required  monthly bill, making note of things like being sure my extra payments are going towards my principal, not interest. I'll be starting monthly payments as early as next month with my bills not starting to roll in until December. Even still, the idea of forever being bound to this unholy company is so daunting: I just want to pay it off as quickly and responsibly as possible.

THAT being said -  the loan itself has different interest rates (depending on what year of college I took them out), but range from 8-8.5%. Would it make more sense to pay off my student loan with a lower interest credit card, paying off more than I could afford from money in my pocket and focusing on credit card repayment? My initial thought is that if I pay off the high interest student loan quickly, the money I owe the credit card, in the long run, will be less than what I would have paid.

a) Are there any points / thoughts I need to clarify?
b) Are there even credit cards with interest rates lower than 8.5%?
c) Is this a good idea?
d) If so, what are some credit cards to look into?
e) If not, what are some alternatives / additional tips to consider?

Thank you, MMM community. I look forward to a good discussion and hopefully good solutions :)

[a.g]

Hmm. Don't know exactly how I feel about this. I haven't done any recent searches, but I'm not sure if there are any cards lower than 8% for anything past an introductory period. Even if there are, you'll likely have to use multiple cards, over multiple years, all of which might hurt your credit. Additionally you have to remember that your student loan interest is tax deductible (in the US), so your 'real' interest rate will be under 8%, making it even harder to find a lower cost credit card. It's an interesting thought, and I look forward to other people's more educated insight in this area.

Have you looked at what interest rates can you get from a per-to-per lender?

[secondcor521]

I doubt you can get lower than 8% either from a peer-to-peer lender or from a credit card at your age and stage in life.  If you had a stellar 20-year credit history, there's probably a few cards out there.

There are some pluses and minuses to student loans.  You can probably deduct some of the interest paid - check the IRS site.  There are deferral / income-based repayment options.  On the other hand, not dischargeable in bankruptcy, and come with some moderately high interest rates.

If I were you, I'd probably focus on two things:

1.  Making double, triple, quadruple payments to get them paid off.  Throw bonuses, tax refunds, Christmas money at them until they're gone.
2.  Maybe getting some 0% intro rate credit cards and shifting whatever balances you feel comfortable that you can make the payments on from the highest rate / most hated SL's to the CC's.  Lather / rinse / repeat as you are able.

1 will help you far more than 2.

Good luck.

[lifejoy]

I have wondered something similar. I have $5,000 in student loans at a 5-6% variable interest rate. My partner has offered to pay my loans with his line of credit, which is at a 3% interest rate (we live in Canada).

I told him no thanks... but I've wondered about this. I'd love to hear opinions (sorry - not trying to hijack the thread!)

[reverend]

Is your credit card rate lower than your loan rate(s)?  If so, do it, if you know you have the discipline to pay it.

The advantage could also be that if you have to declare bankruptcy, you can go bankrupt on your credit card, but not on a student loan. :)   (yeah, I know, I know, it's just a though, not a recommendation whatwith ethics and all that).

[simonsez]

a) First of all, if the majority of your loans are private, realize they are under no legal obligation to have to accept a credit card as a form of payment.  So, you might want to check that it is even possible with your various loans.  Also, what, if any, collateral do you have?  A 401k/IRA does not count as loan collateral.  If you have a house or a number of other assets and the credit card route does not pan out for you, a secured loan will never get a higher rate than an unsecured loan (provided you can find one for a lower % than your loans are).
b) Yes
c) Sure, it just won't be easy
d) No idea, I know they exist but they usually require a lengthy credit record and a sparkling credit score and perhaps a good deal of talking to customer service managers.  The credit card idea is good in theory, just hard in executing it due to all the factors required.
e) i.  If you have different payment plan options, go for the longest amount of payback allowed and if applicable, go for the tiered approach where payments start low and increase every so often.  This will mean the minimums are being paid on all your loans.  Then take the difference from the plan you were on to the amount you pay now PLUS the $800 or so extra you are already paying and put all of that on the loan with the highest interest rate.  This way you minimize the amount of interest you will pay (given your current payback structure) over the course of all repayment.  Keep in mind even though you are paying them back for an "extended" amount of time, you have no earthly intention of being in repayment that long given the extra payments.  If your employment is indeed ripe with training and advancement opportunities, take advantage and hopefully you will earn more quickly to further the loan repayment.  Note: NEVER consolidate your school loans while you are able to make payments above the minimum.  That eliminates all chances of prioritizing you loan repayments in a way as to save interest in the long-run. 
ii.  Secured loan > Unsecured loan (> meaning better) 
iii.  If you have a friend or family member who trusts you and has plenty of liquid money, try being straight-up with them about your situation including your income and offering them a rate sure to be well above what they are earning on their checking/savings account.  e.g. Offer to pay a year's worth of 4% interest on a $3600 loan up front ($144) and then promise to pay $300 each month.  This is a last resort but could be a win-win in a high trust situation.  Keep in mind even a small loan from a family member of friend with a lower interest IS helping you out.  And if you think to yourself "I shouldn't even ask to borrow x dollars, I already have that in the bank" then you should go ahead and throw x at the loans directly.  Note: be comfortable with whatever emergency fund you want.  Don't be uncomfortable with too small of one so you can pay back your loans faster, you're trading risks and problems.

[ChiStache]

I don't have a comment on the credit card issue, but I do have some advice about student debt repayment.

Pay the loans off one at a time. In other words, calculate what you can pay above the minimum, then identify the high interest loans, then pick *one* of those to direct your extra payment (rather than spreading it across your highest interest loans). This method will reduce your minimum monthly payment the fastest, which hedges your risks in case of job loss etc.

For example, when I graduated from law school, I had 12 different loans.  Four of those loans were at the highest interest rate of 6.8%.  I paid an extra 4,000 towards my loans each month.  Rather than spreading that 4K across the four 6.8% loans (1,000 towards each loan), I applied the entire 4,000 to *one* of the loans, eliminating them one at a time. 

Does that make sense?  I might not be doing a good job explaining it. If you list out each of your loans with their respective interest rates, I can explain better.   

[nawhite]

Concerning deducting the interest, in the US you can only deduct the first $2500 in interest/year. Seeing as you're looking at over $8000 in interest payments per year and are in the 10-15% tax bracket (depending on your deductions), you're looking to save a maximum of $375 (15% on $2500) on $8000 which drops your effective interest rate from 8% to around 7.4% best case scenario.

As for possible options for which credit cards you could use, I think your best bet would be trying to get low introductory rates and using those. The Chase Slate card was offering 0% interest and 0% transfer fee for up to 18 months recently but I don't know if they are still offering it or if you can balance transfer off of a student loan without doing credit card voodoo magic (use transfer check to overpay a different credit card then use the refund check to pay the student loan). I also don't know if you could qualify for it as they had rather high credit standards last I looked. Not saying you couldn't qualify b/c I don't know your credit score, just that they have high standards.

[simonsez]

Pay the loans off one at a time. In other words, calculate what you can pay above the minimum, then identify the high interest loans, then pick *one* of those to direct your extra payment (rather than spreading it across your highest interest loans). This method will reduce your minimum monthly payment the fastest, which hedges your risks in case of job loss etc.

For example, when I graduated from law school, I had 12 different loans.  Four of those loans were at the highest interest rate of 6.8%.  I paid an extra 4,000 towards my loans each month.  Rather than spreading that 4K across the four 6.8% loans (1,000 towards each loan), I applied the entire 4,000 to *one* of the loans, eliminating them one at a time. 

Just an FYI, these are mathematically equivalent.  But it doesn't really matter as long as you are paying on the loan with highest interest rate.

I've attached an example.  My simple assumptions about interest rate and payment may not reflect reality, but as long as the same assumptions are used in the three scenarios I gave, I think it should work fine to prove it does not matter.

Edit: Two to Three Scenarios

[ChiStache]

I totally agree that it's a mathematical equivalent. My point was that one-at-a-time repayment has the effect of reducing your required minimum monthly payment faster, which is helpful if you lose your job in the midst of repayment (like I did). 

:)

[Rebecca Stapler]

Ditto ChiStache re: Focusing on loans one at a time. This will lead to greater stability because you will have fewer minimum payments each month. With student loans, the only way to reduce minimum payments is to pay the whole thing off or to change your repayment plan.

If you are determined to put as much $$ as you can towards these loans, I second the idea of getting the longest repayment plan possible, so you can throw the majority of your $$ towards one loan at a time. However, if you ever get derailed from that plan, you will be SO PISSED at yourself that you never paid down any of the principle! Trust me, I know from my spouse's experience. So, you will need to find the balance between getting a little risky but it's OK if you're 100% committed for 10 years (super quick, not reliable, calculation for long it will take to pay off $100k with $800/mo).

That said, I do recommend that you figured out how long it will actually take to pay the suckers off with $800/mo extra towards them. That will (1) motivate you to reduce your expenses and (2) help you plan your repayment strategy. Then follow it up with an adult drink (you may need it).

As to the tax benefits of paying interest on SLs, your state might also allow for a deduction, which will double your tax savings for having the loans.

Given all that, I don't think you'll find a CC with a low enough interest rate for the length of time you need it to be low, for all of your debt. But if you want to put one of your loans on an 18-month no interest CC, with the goal of paying it off in 14 months, then give it a try. Just make sure you get that sucker paid off. In fact, maybe doing that will motivate you even further to get rid of the loan, because you don't want it earning interest after that intro rate! 

[simonsez]

I see what you mean ChiStache and Stan re: focusing on one.

I guess my ambivalence toward minimum payment amounts (since the math is equal if you spread out extra payments between loans or not) stems from my assumptions of omnipresent employment and omnipresent additional payments each month (of which the amount coupled with the minimum payment is ALWAYS higher than the standard repayment plan would have been).  These are admittedly not the most robust assumptions but either way, loan repayment in general gives me added motivation to work hard at my job and be fiscally sound elsewhere to make sure I have the means to get rid of the loan(s) as fast as optimal for my situation* should I get laid off or some other life event occur.

*-I have two (out of 14) student loans at the fixed rate of 2.14%.  I have no intention of putting a single dollar above minimum on these anytime soon due to opportunity costs.  I also advocate forgoing student loan repayment dollars when there are still employer-matched retirement dollars still on the table.

[Mayan]

Most student loan servicers won't let you pay loans on a credit card.  There are ways around it with payment services or balance transfers, but most will incur a fee (typically 2-3%).  I looked into it when I was paying down my loans last year, as I was interested in getting credit card rewards for (at the time) my biggest spending category and potentially paying less interest.  For me, it didn't make sense - no way to get cash back without paying more than I'd make in fees, and a fairly negligible interest savings at much higher risk if I balance transferred onto a card with a 0% introductory rate.  YMMV

[randymarsh]

No loan servicer will let you use credit cards to pay directly. But you can write one of those (0%/low interest of course!) balance transfer checks to yourself, deposit it, and then make a payment from your checking account. Almost all BT cards have a 3% fee on the transfer amount so that will be added to your balance. Do the math to make sure it's worth it.

You have to plan this strategy well though. You need to get high enough CC limits to transfer worthwhile amounts to save on interest. But, you don't want to transfer too much. You need to know you can pay off the CC before the promo rate expires. You'd likely qualify for another BT card at the end of the period, but you're taking a chance. You can never ever make a late payment or you'll likely lose the promo rate and be jacked up to the penalty rate. On my cards, this is around 26%!