Using interest free cards to delay using Stafford loans for college

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shmuey
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Using interest free cards to delay using Stafford loans for college

Postby shmuey » Wed Apr 02, 2014 8:02 am

I'm starting graduate school this summer and have estimated I'll need to borrow about $15k/ year for the 3 years it will take me to complete my program while working full time. Assuming nothing changes for me financially I believe I can afford to pay ~$250/month towards the $15k I'll need to borrow each year. I'm trying to work out some logical way to charge the first 15k (which will come 3x/ year in $5k charges) on an interest free credit card, pay off the balance as I can afford, and then use the Stafford loans I qualified for to pay off the balance. My logic behind this is that I'll avoid collecting interest on the loan if I can avoid taking it until the very last minute. I routinely get offers for new credit cards with 15mo 0%APR in no small part due to my relatively high credit scores and want to take advantage. I know that at the end of the 15mo I will not be able to pay the remaining balance in full and don't want to pay the standard APR.


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Postby haikuginger » Wed Apr 02, 2014 10:42 am

shmuey wrote:I know that at the end of the 15mo I will not be able to pay the remaining balance in full and don't want to pay the standard APR.


Here's the key. If you can't pay the credit card off before it starts collecting interest, then it's a bad idea. Carrying a large balance will also make it more difficult for you to obtain other credit, and most credit cards charge a 4% fee for transferring a balance.

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djrez4
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Postby djrez4 » Wed Apr 02, 2014 11:39 am

Interest on Stafford loans is deferred, so you're not paying interest while you're in school anyway. I suggest it's better to stick with the Staffords at 6% or so (what's the current Stafford rate?) than to put in on a card and risk 13+% interest when you can't pay it off in time.
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Postby linuxmachine » Wed Apr 02, 2014 12:28 pm

djrez4 wrote:Interest on Stafford loans is deferred, so you're not paying interest while you're in school anyway. I suggest it's better to stick with the Staffords at 6% or so (what's the current Stafford rate?) than to put in on a card and risk 13+% interest when you can't pay it off in time.


+1
Assuming you are on schedule, you'll have paid 9k of it by the time you're done. That leaves 6k, which you could balance transfer to a 0% credit card (or two) afterwards.

jlam572
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Postby jlam572 » Wed Apr 02, 2014 12:32 pm

I agree with others the the Stafford is a better choice. Deferred interest until 6 months after you grad. A rate of 6.8% which is lower than most cards. Also interest is tax deductible on the student loan as opposed to the credit card. I think the max is $2500 deduction though per year.
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shmuey
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Postby shmuey » Wed Apr 02, 2014 1:20 pm

As far as I understand there are no Stafford subsidized loans for graduate education and therefore I'll be paying 6.8% from day 1. Wouldn't it be possible (in theory at least) to just wait until my 0% apr is ending and then obtain the Stafford loan and use it to pay off the balance? I'll effectively eliminate 15months of interest accrual.

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Postby MemberSince99 » Wed Apr 02, 2014 9:00 pm

It's a terrible idea honestly for a lot of reasons. First, you'll be loading up those cards and I would imagine pushing up the utilization which will drop your score. Eventually the interest free period will run out, and then you will be paying a whole hell of a lot more than 6.8% interest on them. Installment (student loan) debt is considered in a different light than revolving debt as well so your score is going to pay the price for this and you will be paying dearly once the interest free period ends. Then you'll spend years trying to pay off the balance on a card with high interest rates and will take a lot longer to get out of this debt and who knows what the score drop will cost you.


That assumes you get a good job and are able to pay of course, but either way that's an issue it's just that you could get a hardship deferment on the student loans but there is no such thing on credit cards.


In fact the ONLY positive I see using credit cards for this is you can discharge credit card debt in BK where student loan debt is extremely difficult to get discharged.


It's a really poor idea and if you do the math straight up I think you'll see it doesn't pay, let alone with your credit taking a dive, but it's your life.

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Postby JoDa » Thu Apr 03, 2014 6:19 pm

In addition to the excellent points above, you wouldn't just be able to obtain the loan and pay the balance when your 0% period expired. You can only take the money to pay expenses you're currently incurring, not what you've already incurred. So, over your first 15 months, you charge $25K ($5K x 5 3-month sessions) and then take the loan. They'll disburse you $5K for your next semester, then another $5K each subsequent semester, leaving you to either pay the $5K towards your balance and pay the new $5K on the cards, or make payments on the $25K (minus whatever payments you made in the meantime) and use the $5K towards your continuing expenses.

If you take the loans as they come and pay $250 on them every month OR take only $4250 each semester and pay the other $750 yourself out of that money you have, you won't hit the wall of "pay the CC bill or pay for tuition." Plus, yes, you can deduct the interest from the student loans but not the CC so long as you're paying, so it might make sense to take the full $5K up front, make monthly payments, then write the interest off, giving you, actually, slightly more than $250/month to pay towards the loans. If you pay that much, on the balance you've described, you'll actually make a dent in the principal, so you'll come out with less than $45K owed (I know, my loans are almost exactly that much).
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JoDa
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Postby JoDa » Thu Apr 03, 2014 6:35 pm

Also note that student loan interest is an "above the line" deduction, so you don't have to itemize to get it otherwise. You may also be able to "double dip" into some of the education credits or deductions for current students (also above-the-line deductions/credits). You may want to talk to a basic tax advisor (someone like H&R Block or Jackson Hewitt would even be able to handle these questions) to see what you qualify for, especially since some of the education credits are REFUNDABLE, so if you qualify, you may get MORE BACK THAN YOU PAID IN TAXES, which, again, you could turn around and use to pay towards the loans and come out better off at the end of your program.
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darkguy2
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Postby darkguy2 » Thu Apr 03, 2014 6:47 pm

The current rate for grad loans is 5.41%. You can borrow up to $20,500 a year which is higher than undergrad loans. Like JoDa said you can only take out loans for the amount of current education costs. But that is not just tuition. It is also living expenses like rent and food. You are not supposed to use it to pay off debt. But the chance of them finding out is small but it is a big risk still. You can deduct up to $2500 in interest you have payed off that year from your taxes and it can be taken on top of the standard deduction so you would not need to itemize. BE AWARE THAT IF YOU PAY OFF ANY OF THE PRINCIPLE THEN INTEREST WILL START TO COMPOUND. With Stafford loans you will accrue interest but it will not be added to the principle until 6 months after you graduate so interest charges do not increase. That means it will make no difference if you pay off the interest as you go or if you wait till right before you have to start making payments and then paying off all of the interest. If you pay off all the interest and part of the principle then the interest will start being added to the principle. This will not be true for credit cards.

Also you have some good benefits that come with Stafford loans. You can reduce you payments based on your income if you are having trouble paying them off. You can also go work for the government or as a teacher and have all of the remaining debt forgiven after a certain number of years. I think it is 10. You can also apply for deferments or forbearance if you are having severe money problems. They are better than private loans.

Source: Have $30,000 in Stafford loans.
Discover IT - $5,700
Chase Freedom - $5,700
Costco Citi - $13,000
Sallie Mae - $4,000
Chase Sapphire Preferred - $6,000
Chase Sapphire Reserve - $19,500
Citi Double Cash - $6,500
Amex BCE - $13,000

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