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Should You Pay Off a Student Loan With a 0% Interest Credit Card?

By Erik Folgate

This is a question that a friend of mine asked me recently, and I thought it would be a good question to throw out there to the readers of Money Crashers. If you are in your twenties, it seems like you’re a weirdo if you DO NOT have a student loan. The reality is that college is not getting cheaper, and many of our parents did not pass along a college fund for us. I have about $18,000 in student loan debt, and my wife will have even more than that. She’s in physician assistant school right now, so her student loans will definitely be worth it in another 12 to 18 months. The National Center of Education Statistics shows that a little more than 50% of students hold student loans at an average of about $10,000.

So your out of college now, and the college loan lender is knocking on the door. They want you to start repaying the loan. What’s the best way to pay off this loan? My personal philosophy is that you should pay off credit card and student loan debt as quickly as possible. Do not play the interest game where you can invest the money that you would use to pay off the loan at a higher rate than the interest you are paying on the loan. The reason I think this is a completely bogus thing to do is because the people that argue this point never factor in the added risk involved and the taxes you will pay on the capital gains that both diminish your return to almost nothing.

My friend’s question is a little different. He intends on paying off his $4,000 student loan in a year. His question is whether he should pay that student loan off which is at 7% interest right now, and pay off the 0% interest credit card balance in a year. Well, the first thing you need to do is make sure that you can afford to make the $380 monthly payment that it will require to pay off the amount in one year. Do you already have enough left over in your budget to make that payment or will you need to get a second job or sell some stuff to pay it off in a year? Figure that out first, and then move on to the next step. The next step is deciding whether you should keep the loan where it is or transfer the money to the 0% credit card.

I answer questions as if it were me in the situation. I would keep the student loan where it is and aggressively pay it off within a year. The reason for this is that credit card companies are extremely sneaky. You need to make sure that 0% credit card offer does not have a hidden balance transfer fee built into it. Some credit cards will charge you a flat 3% fee just to make the balance transfer. Sometimes, you can negotiate with them, and they will waive the balance transfer fee. Also, credit card companies love to penalize you for making one slight error. If you are even one second late on your payment to a credit card, they will hit you with a $39 late fee AND they will void your 0% introductory interest rate offer and bump you to their normal rate of 11 to 19% interest. If this happens, then it was not worth it at all to transfer the student loan over to the credit card. Student loan companies are generally more forgiving when you are late on a payment. If there’s no balance transfer fee and you are meticulous about making credit card payments, then this could work out that you save a little bit of money from paying less interest while you pay off the money. However, my point is that many of us are not perfect when it comes to making a bill on time and credit card companies are sneaky when it comes to luring people into a 0% interest rate card. If you are looking to consolidate some existing credit card debt to a 0% interest rate card, I would definitely do that. The debt is already with a credit card company so there’s no added risk in bringing it to another card that acts the same way.

Pay the loan off with the existing student loan company in 10 to 12 months, and you won’t even think about the $200 bucks you could have saved with the 0% card. The risk involved with sending the money to the credit card company is enough to make me stay away from going that route.

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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  • Bill

    Having paid off college loans and currently working on graduate school loans, I feel your pain.

    While I agree with much of your post, I disagree with your single minded focus on paying off student loans as soon as possible.

    Lets say you are dealing with $10,000 in student loans.
    $5000 is at 5% fixed for 20 years
    $5000 is floating at 7.8%

    You have the ability to pay all interest and have $10,000 towards principle or savings.

    Keeping the two loans in place will cost you $640 in interest charges. From this number, one has a lot of choices to consider:
    1. Is the interest tax deductible? If so, they may be costing you $500 in after tax dollars.
    2. Savings gives you power and options. Instead of paying off the loans, you put the money in a saving account earning 4.5%. You will bring in $450 with an after tax take home of around $300.

    Bottom line, keeping the loans in place costs you $200-300 per year.

    What does the $300 get you:
    1. Better credit ratings lead to lower mortgage costs, car loans, and insurance.
    2. People who “need” money get it, but it costs them. Having 10K in the bank is great insurance against car repairs, medical bills, living arrangement issues.

    My general rule:
    1. Take “available” free cash flow and split it 50/50 until you have a reasonable cash cushion. How big a cushion you need depends on things like available family funds, dual incomes, stability of current job/pay propects. The more risk one has, the more they need cash on hand.
    2. Once the cash savings reaches 3 months expenses, change the allocation to 75/25 debt/savings.

    In my example, I would recommend keeping the fixed loan in place for a while. I would probably pay off the floating rate loan. Saving 100% until I got back to $10,000.

    I cannot underestimate how much I have saved by maintaining a stellar credit rating. I crashed my car last year and my rates went down? WFT? When I needed a car loan and a mortgage, I had a lot of leverage with bankers and got the best deals possible.

    Good luck to you and your friend.

    • Amy

      I also have a significant amount of student loan debt, and I think Bill has a point that there are many situations in which it makes sense to go all out to try to pay off student loan debt first.

      In my case, I have about $140,000 at 2.75% fixed and $10,000 at 5% fixed. So for me, it seems worth it to work on the $10,000 loan more quickly. But as much as I dislike being in debt, I just haven’t found it financially reasonable to make extra payments on the $140,000. Certainly emotions can come into play. But there should be a balance. If I decided to use all the money I put away for retirement for my student loan, I would pay an extra $9240 in taxes, and I wouldn’t be able to get the student loans interest deduction, which would be $700. So that is >$10,000 per year. I will have to pay taxes on that money, when I retire, but I can live with that.

      Obviously, not everyone managed to graduate at the right time to get the interest rate that I did. But I think it is important to sit down and do the math before making a significant financial decision.

  • author

    I understand that you save money doing it the other way, but I am saying that the level of risk involved is not worth it to me for the extra $100 or $200 savings in a year.

    Also, don’t believe the banks when they tell you that you have to keep debt around to have a good credit score. Look, you can get a good mortgage and low insurance rates without caring debt for no reason.

    I agree with you to save up a couple of thousand dollars before you start paying off debt aggressively, but letting student loans linger around just doesn’t make practical sense to me.

    I think personal finance is about more about the PERSON, not the FINANCE. Don’t always let the numbers dictate your decision. Do what your heart tells you is the right thing to do.

  • Jacquelyn Hart-McCoy

    That is a great point I think a lot of peopl forget, even myself sometimes. You do have to do what is best for you and your family, even when it may not be the best option on paper it may be the best option for your real life situation.

  • Pingback: “Holy Cow, Batman! That 0% Credit Card Cost Me 6%!” : The Dough Roller()

  • BigBoy

    What are you guys talking about? There is a much easier way to do this kind of thing.

    First, get a credit card that can pay off your student loan and pay your student loan with that credit card.

    Second if you have some credits left, but a lot of stuff, make sure everything is paid in full by the credit card

    Third, file bankruptcy. And 7 years later you are clear with no debt and no bad record.

    • Guest

      First, I believe it’s 10 years now and second, there is no difference between this and stealing. Just because you’re just breaking into houses doesn’t make you less of a degenerate.

      • Kenh

        If I could get a credit card to pay off my $120,000+ student loans then declare bankruptcy I would do it in a minute.Student Loans are the WORST possible debt.There are no options to refinance or consolidate if have done it previously at a higher interest rate.

        • Nicholas Anderson

          If you did that you’d be prosecuted for bankruptcy fraud, lose your discharge (meaning be stuck with your debt) and possibly face criminal charges as well. Don’t do it.

      • Nicholas Anderson

        It’s 7 years. And yes, it’s totally unethical.

    • Jnicolec13

      Gosh, no one on here can take a joke, can they?? Nicely put BigBoy!

  • http://madsaver.com Mac

    I was lucky to only have $8K after my college graduation. For the first few years I tried to pay a bit extra, but eventually just paid the standard amount each month. Normally, the interest rate on student loans are quite low, and you can deduct part of the payments through your taxes. So I never considered using my high-interest credit cards to pay it off, especially since those 0%-interest deals only last a year at the most.

    • ThaRealDeal

      Wrong, they have 18 month 0% cards as well.

  • http://www.artificialrobot.com Sean

    I agree, the whole thing seems overly risky to me. Student loans were setup to be more or less a fixed loan that you can pay off over time. Credit cards are out to make money from you, if something goes wrong and you can’t make your payments to pay it off in time you will be paying a lot more than 7%. Stick with the student loans and pay that debt down. The student loan is also “better” debt. No one likes debt, but stick with the safer debt.

  • rickr

    After 4 years of dedicated service, my boss would rather pay for me to get an MBA, but will not help with the repayment of my student loan. Even though my masters degree directly benefits the company. He would rather spend the money helping me earn a second advanced degree. At this rate putting a gun in my mouth would be an easier choice.

  • Vive

    I put a chunk of my loans (about $5000) on a card with a fixed 1.99% rate and have yet to regret it (and will be done paying them off by February). I got over my nerves about putting them on a credit card by only putting a small amount on the card. That way if interest rates jumped, I could pay it off quickly. But I have been paying $20 a month for a while on them.

  • Anonymous

    That’s poor advice. 0% balance xfer cards are a gift to responsible people subsidized by the morons who don’t pay on time or stay with the company after the honeymoon is over. I did exactly what your friend did with a 10k card, for the one time fee of 1% or $100 to pay down a line of credit that was at 6%. Within 11 months, I saved (made as I see it) 500$ by doing nothing but filling out an online application and setting up pre-authorized payments.

    If your friend has any fall back plan (a parent or a line of credit) just in case he absolutely needs to pay off the b/t card, say because he managed to miss a payment and the rate is jacked to %19.99, it’s a no-brainer.

  • Sean

    The problem is that everyone thinks that they can make it work until they lose a job, fall into bad health, etc. Federal student loans have protections in place that make them more attractive to people without safety cushions, and, if you pay a loan off within a year anyway, it’s a safer bet that leaves you paying relatively little in interest, even compared to the 0% card.

  • bgdc

    As long as the card has a 0% transfer fee, go with the card. There’s no risk involved. Credit card companies are not sneaky. Set up autopay on the card and walk away.

    If you are a smart, responsible person 0% cards are free money.

  • TM

    Definitely transfer the money to the card, that is common sense. If you intended to pay it off in a little less than year and the loan rate was 7%, you would still save more money even with a 3% transfer fee at 0%. I’m pretty certain I just heard Suze Orman tell someone they were smart for doing this. Plus, they don’t up the 0% on you when you miss one payment anymore and they can not up the 0% for absolutely no reason either. Yes, definitely transfer it to a card, even if you know it might not be able to pay it off in the 12-18 month period, you’ll be able to get another 0% from somewhere else with a 3% fee for another 12-18 months and you’ll still have only paid 6% over 2-3 years, rather than 7% for just one year as a student loan.

  • Grammarpolice

    “So *you’re* out of college now”

  • http://www.growingfamilybenefits.com/ Kevin Haney

    I agree that using the balance transfer presents more risk than reward. You are saving a nominal amount of interest on the student loan, in exchange for a sharply higher cost. Most people lack the financial discipline.

    If someone feels that have to capacity to pay of the balance transfer in one year, why not just apply these funds to the student loan?

    The answer reveals why banks make the 0% transfer loans in the first place. People start out the good intentions (paying off the loan), but most fail to follow through. The banks reap the benefit through interest charges, fees, etc.

  • PRINTINGISEASY

    TOTALLY DISAGREE! If you are a disciplined person and can pay off the student loan within the time of the 0% offer, GO FOR IT!!! That is well worth the savings! I have been late once or twice and the credit cards companies that I have dealt with are Very Cooperative and have waived the late fees. What I have done since then, is set up automatic payments so this doesn’t happen. It also helps your credit score/rating tremendously to see see monthly ON TIME payments… Again, GO FOR THE 0%!!

  • Dave Payoff

    There is a way that not many people know about that will pay off your student loan FAST and forever! Using the governments money is as easy as using an IPN to pay the debt off. If you think its too good to be true then research it for yourself…

  • SallieMaeIsAB****

    Looking into this right now. In the last 4.5 years I’ve paid about $16,000 towards my $19,000 SallieMae loan and still owe a disgusting $15,000. WTF! Put a $100 extra towards the loan and next week it’s up $40 already, cancelling out half my payment it seems. It’s a never ending one step forward two steps back. If I could get 0% for 12 months and hammer away I could pay it off, or there are a number of 18 month 0% cards just in case. I’m sure it can’t be that easy though. Trying to find the .05 size font on how this wont work.

    • Jamal_sanchez

      That’s weird. My Sallie Mae loans are at 6.8% interest mostly. At that rate, you’d only have $7,000 in interest in 4.5 years, if you made no payments. Unless it accrued while you were in school – then you need to look at the principal balance as more like $25,000.

      Anyway, it’s worth checking to see if they’re applying any extra payments to reducing the principal, instead of deferring the due date. I’m not entirely sure the process, but I’d give them a call.

  • Nolan Hughes

    If someone is worrying about paying off just $380 a month for student loans then obviously they didn’t use their time at college wisely. I have already paid off $4,000 of my student loans since the start of May and I was unemployed for 3.5 months out of that time and I currently make just $1,000 a paycheck. I put about $400 to $600 per paycheck. I am planning to go to med school or another grad school so I won’t be paying it back for a couple years so right now I put most of my paycheck to my student loans. Even if you had just $4,000 in student loans you could still pay that off in 24 months instead of 12 if it really is cutting into your other needed expenses and you would probably see just.

    Right now, he has some awful rate for his loan if you ask me. Right now if he has the 6.8% standard Unsubsidized rate he really is just gaining a little less than 75 cents a day in interest. So if he pays $190 a month he could cut his interest down about 3 cents per day every single time he pays. If he is still just a couple years out of college, a $4,000 student loan still is pretty good to have.

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