Occasionally, readers email me with questions about their own personal finances. Considering I share so much of my own, it’s always interesting to get a peek into the issues other people are concerned about. In fact, right now, I am actively seeking reader questions to serve as launching points for a discussion I plan to have with Ramit from I Will Teach You to Be Rich.
I always remind people that I am not a financial professional, and whenever seeking free advice, you get what you pay for. But that doesn’t mean I can’t have some opinions or thoughts, and by sharing questions with Consumerism Commentary readers, we can usually come up with some good suggestions.
Here is the latest question I received, from Gerry:
I currently have two rather large students loan. One at $30,000 (4.5%) and one at $15,000 (2.5%). I pay about $300/month towards the larger one and $125/month towards the smaller one.
I was wondering if any bank might ever offer a 6 month or 12 month loan at a lower interest rate. Could I take a $2,000 or $3,000 loan and throw it at the larger loan and pay the bank back instead. Would this even make sense for me?
Note: I am also in school, so my loans are in deferment, but I still make the above payments.
The reader is off to a great financial start by beginning to pay off deferred student loans while still in college. In most cases, students do not need to begin paying off student loans until six months after they end their enrollment (preferrably at graduation), so this head start will be beneficial when living expenses increase a few years down the road.
It’s hard to find better deals for borrowing than student loans. There is only a low probability of finding a bank that will offer a loan at a lower interest rate than 4.5% to pay off an existing loan. If finding a rate lower than 4.5% is important, I would suggest using your “social capital” and ask for the money from a relative. This is a risky proposition; personal loans can be dangerous for the health of the relationship, so this is an option one should consider carefully.
Students with deferred loans have the flexibility now not to make payments if they are causing a financial strain. I would consider taking advantage of that flexibility when it is available. While it’s admirable to pay off the loans early — no debt is “good” debt — student loans are deferred because it allows students to focus on their education rather than trying to find work to create an income.
Am I off the mark? What advice would you give Gerry?
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{ 7 comments… read them below or add one }
Why pay anything towards this loans? Given how low the rates are and the tex-deductiblity of the interest, I would invest the the monthly payments instead (stocks if you think the market has reached bottom, municipal bonds from your state if you are leery of the market). This way, you’ll likely be no worse off, and probably better, than paying the loans. Once your deferment is over, either make a lump sum on the loans, or if your financial situation allows, ride the investment out. In addition, you’ll have the flexibility to cash out the investments if you have unexpected expenses or it takes longer to find a job out of school. Once you put money towards that loan, you’ll never have access to it again.
Re: taking out a small loan, no. First, it would be heard to find an unsecured loan offering a better after-tax rate than your student loans. Second, why bring another lender into the picture. Third, a bank loan won’t have the same protections (e.g., deferement for unemployment, economic hardship) and won’t be tax deductible.
Finally, if you’re going to keep paying off the loans, why put any towards the lower interest loan now. Put everything towards the higher rate loan.
I agree that it’s almost impossible to get a lower interest loan than a student loan, and the only other option that popped into my head was a 0% intro APR credit card. Problem is, they charge at least $90 for a cash transfer, and that’s already 3% to 4% of the $2,000 to $3,000 that the reader wants to borrow.
(Running the numbers and amortization schedules in Excel…)
After running the numbers, I realized that this will not be worth it, because the student loan continues to compound interest on top of interest. Even if you borrow $3,000 at 0%, and concentrate on paying that off during the first year, you will save $2,700 on the larger loan, but due to that $3,000 simply being shifted, will actually be $2,700 – $3,000 = -$300 worse off. Unless the reader is able to continue paying the $300 a month on the large loan, AND pay off the new $3,000 loan in one year AT THE SAME TIME, it’s not worth it. And if they can do that, it’s better to put that money towards the original loan, anyway.
Thanks for posting my questions Flexo! Just a quick clarification:
I am currently in GRADUATE school, while working full time. So, being in graduate school caused my undergad loans to go back into deferment. And the large loan ($30,000) is private and not subsized….so still accruing interest. I’m just not required to make payments.
But good idea to at least put all money towards the big loan and not worry about the smaller one. The smaller one is a government one and subsized.
Thanks everyone!
At the heart of his question is ‘I was wondering if any bank might ever offer a 6 month or 12 month loan at a lower interest rate.’
I don’t believe that he could get a 6-12 month unsecured loan anywhere at a lower rate than his current student loans. If he does, please give him my email address because I’d totally jump on that.
The closest thing is the balance transfer suggestion by Rassah, but I have a hard time making those numbers work out if there’s a transaction fee involved for any of the APR specials being offered. (0% for 6 mos, 2.99% for 18 mos, etc.)
The question is are these subsidized or not.
If they are not then he should be paying all the money to the higher interest one.
If they are subsidized, put the money in the bank and earn some interest.
First: I do not have any student loans. I have never had a student loan.
I heard a former colleague tell the following story in [about] 2000:
His son had racked up almost $100,000 in student loans after getting through a BA and MBA programs. He was working for a financial services company and hated the work so much that it was affecting his health. He decided he wanted to abandon a career in finance and pursue something entirely different, but the burden of the student loans was oppressive and that student loans could not be discharged through bankrupcy.
Since his credit was excellent, he got a regular loan: 10 years at a somewhat higher rate than his student loans and used the proceeds of that loan to pay off the student loans. He then defaulted on the new loan and declared bankrupcy.
The bankrupcy hung on for whatever statutory period while he learned plumbing but disappeared before he was 35. He is out from under the student loan with a fresh start.
OK, is the story true? Don’t know. I have long since lost contact with my former colleague and have no way to verify it.
I have about $30,000 in student loans. I have desperately been trying to pay it back. I have created an Alaska movie here:
http://www.filmbaby.com/films/4148
Any help would be greatly appreciated
THANKS!