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Currently student loans are at an all time low interest rate, which is a
great deal for those currently attending college. But, if you're like me
and attended college in the nineties or in the eighties then you know that
there was no such thing as a low interest rate. The best you could hope
for was around 8.25% and usually 9 or 10%.
By today's standards, this is outrageously high and loans with interest
rates this high are darn near impossible to pay off in a decent amount of
time. Moreover, by the time all of the interest is paid it almost doubles
the loan amount. I guess you could say this is the magic of compounding in
action. And unlike traditional loans that can be financed at a lower rate,
student loans don't have this option available. So, most people just
trudge along and continue to pay year after year after year.
However, after some research and creative financing I have come up with a
viable way to get around high interest rates thus shortening the time it
takes to pay off old loans and pay less in overall interest.
Basically, I contend that one of the best ways to eliminate student loans
quicker and at a much lower interest rate is to transfer the old loan onto
a credit card that offers a low to no interest rate on balance
transfers. To verify this I asked my friend Terry Rigg, owner of The
Budget Stretcher (http://www.homemoneyhelp.com) to do the comparison
calculations.
Here's a comparative analysis he did. A student loan in the amount of
$15,000 at 9% with a payment of $300 per month would take 5 years 3 months
to pay off with a total interest amount of $3,870.56 in interest.
However, by transferring this same $15,000 to a low interest credit card
with an interest rate of 3.9% for the life of the balance transfer, it will
only take 4 years 7 months to pay off making the same $300 per month
payments. The total interest paid would be $1,337.90: a total savings of
$2,532.66 with a pay off eight months sooner.
This method isn't for everyone, but it is a viable option for those who
wish to unload old high-interest student loans once and for all. And,
obviously, good credit is a necessity to obtain low balance transfer
rates. However, before making the decision to use this method, it's wise
to go over the pros and cons of each method.
The Pros and Cons of Keeping High Interest Student Loans
Pros:
- Student loans can be put into deferment/forbearance if you should ever
experience economic hardship.
- Interest on student loans can be used as a tax write-off for a certain
number of years.
- In certain very rare cases, student loans can be forgiven.
Cons:
- Student loans continue to accrue interest while in deferment/forbearance.
- Interest on student loans transferred to a credit card is not eligible
for a tax write-off.
- It is next to impossible to have student loans forgiven.
The Pros and Cons of Transferring Student Loans onto a Low Interest Credit Card
Pros:
- Faster pay off time and less interest paid.
- Bankruptcy can be filed on credit cards if you experience economic hardship.
Cons:
- Credit Card amounts can't be put into deferment/forbearance.
- Miss a payment or be late making a payment means loosing a low interest
rate.
Obviously there are pros and cons for both sides. Most important, however,
is your level of tolerance where debt is concerned. For many people, a
seemingly never ending cycle of payment after payment made to high interest
student loans with the majority of each payment going toward interest is a
huge burden.
I don't recommend this as an option for people already on the precipice of
economic failure, but rather for people just looking for an alternative way
to eliminate old student loans quicker and cheaper.
Each person should weigh their situation carefully before deciding to take
this or any other route where student loans are concerned. For me, this
presented an excellent option to finally rid myself of an old pesky student
loan once and for all.
About The Author: Jona Kessans is the editor of Simple & Frugal News and the Simple & Frugal website http://www.simpleandfrugal.com : a website dedicated to providing information to those on the journey to simplifying their lives. She has been practicing simple living/voluntary simplicity for over 10 years and is available for speaking engagements. She can be contacted at mailto:simplefrugal@fuse.net.
Terry Rigg is the author of Living Within Your Means - The Easy Way http://www.homemoneyhelp.com/ebookadpage.html and editor of The FREE Budget Stretcher Newsletter and Budget Stretcher web site http://www.homemoneyhelp.com. He has 25 years of experience counseling individuals and families concerning their personal finances.
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