In 2017, one of my goals is to start paying back my student loans. I plan on implementing my payoff strategy. I would like to have paid at least one third of my student loans by the time I graduate so I can reduce the interest that’s been accumulating while I was in school. Currently, my balance is hovering around $160,000. So the amount I would like to pay before graduating in May 2018 is around $54,000. Paying off my loans is going to be just like paying off my credit cards but on a much larger scale.
– Balance Transfer: If there ever was an upside to having a credit card balance repeatedly and being forced to pay it off, it’s the fact that it will help you build your credit and in turn give you a higher credit limit. Obviously there’s a better way of building your credit and being able to have a high credit limit. But this is how I’ve gotten it. I’ve never not paid my credit card balances. My issue has been keeping them paid. So I currently have a high credit limit which I plan on using to pay off my student loans. This method is risky and unconventional but I think will actually work for me. Every time I’ve had a credit card balance, I’ve found the inner discipline to make sure I drive it down to zero. So far, I’ve gotten those balances by buying things I don’t need. Why not just load one student loan out of the 11 I have onto the card and tackle it aggressively? Here’s why I think this will work.
Many of my student loans have interest rates that are above 6%. They accrue interest daily and between September 2015 and today alone have added about $9,000 to my total balance. Student loan interest rates are compounded daily and adjust to be a percentage of the new balance. That means that the amount I owe is increasing by over 6% of the total amount (principal + interest) and not just the principal amount I borrowed. If I use the balance transfer option of my credit card, I will have the option of getting 0% interest for the next 12 months. That’s 12 months of not having the interest grow out of control! I will stop the hemorrhaging and be locked into a timeline that I have to abide by to pay off the amount I transfer. Also, for once, I’ll be doing something completely constructive with a credit card. I’ll be paying off a student loan and building my credit at the same time. I plan on tackling the loan with the most accrued interest first and working my way down. There’s also the added fear of not letting my balance transfer offer expire before I pay off my loans and having to pay 21% interest on my loans to incentivize me. So I’m motivated by both fear and logic.
In addition to building credit and reducing my student loan debt, I would also be able to reduce my total debt to income ratio with this method. The debt to income ratio is the result of dividing your monthly recurring debt by your monthly gross income. The lower your debt to income ratio, the better because it means you’re not over leveraged. This is important for me because I plan on investing in more properties and lenders take this ratio into consideration when they’re deciding how much loan they should approve you for. If I can reduce my DTI by a significant amount by using this method, then I can be able to qualify for a larger loan which will allow me to purchase more lucrative real estate like multifamily properties.
Finally, the most morbid yet equally beneficial reason I’ve thought of to do this is the fact that a credit card balance is forgivable in the event of bankruptcy and death. Student loans are not. So if I have to file for bankruptcy, I know that whatever amount I have put on my credit card would be wiped out as a result. Additionally, my estate will not inherit my six figure debt in the event that I pass before paying off my student loans. Hopefully I won’t go bankrupt or die anytime soon. But I can’t discount this benefit just because its not fun to think about.
I’ll be posting about more methods I plan to implement for my payoff strategy.