Recently, I had a great idea to get out from at least one of my student loans and into a better deal! The loan I want to get rid of is a Stafford Loan that currently is at 6.55%, and has a balance of about $10,000.
It is at FedLoan, which you can read more about why we want to get away from the worst student loan servicing company.
My plan was simple – I could roll my student loan into a new car loan, which currently has a rate of anywhere from 0.9% to 2.9%. Why do this? First, I want to get away from FedLoan.
Second, if the sh*t hits the fan, car loan debt can be discharged in bankruptcy, but student loan debt can't be. Third, the interest rate is phenomenally better, and the total interest I would pay is about a third less (even after the tax deduction is taken into consideration). And finally, I didn't want to dig into our emergency funds to pay off either the car or the student loan (but I did need to have enough cash outstanding to have equity in the car).
The other important thing to remember is that car loans use simple interest, so your interest is fixed over the life of the loan. Student loan interest is compounded, so interest is accrued on any outstanding balance, even past interest.
To actually execute the plan, I would purchase the car at the dealer and take out the loan on it. I would then use the proceeds from the sale of my current car (which is paid off) to pay off the loan. Then, the only remaining debt would be the car loan and not the student loan.
The Breakdown of Getting Out Of Debt
FedLoan Student Loan
$10,000 at 6.55% for 68 months
Total Interest over Life of Loan: $1,997.33
Total Interest After Tax Deduction: $1,397.91
Car Loan Option #1
$10,000 at 0.9% for 36 months
Total Interest over Life of Loan: $139.36
Car Loan option #2
$10,000 at 1.9% for 48 months
Total Interest over Life of Loan: $392.72
Car Loan Option #3
$10,000 at 2.9% for 60 months
Total Interest over Life of Loan: $754.57
As you can see from the options, Car Loan Option #1 is definitely the cheapest over time, but it requires the highest monthly payment. The interesting option is Option #3, which has a very similar payment to our current loan payment, but the interest over the life of the loan is so much less, and it is paid off sooner that the current student loan.
Just some food for thought. Don't go buying a new car just to do this. Your vehicle needs should also play a part!
Update: A Better Plan
When I wrote this article back in 2012, there were not many options to directly refinance my student loans. Things have changed now and there are many lenders willing to refinance both private and student lenders at rates as low as 1.9% APR and payments terms from 5 – 25 years.
I recommend using Credible, a marketplace for student loan refinancing. With Credible, you can receive personalized offers from up to 8 lenders for free after filling out a single form.
Read The Story That Drove Me To This: