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I have student loans at a rate of 6.55%. I have zero credit card debt - and have a card with a rate of 6%. I have a comfortable amount saved for emergencies and have some extra income that can go towards debt elimination.

Does it make any sense to use the line of consumer credit to save on student loan interest? If so, what's the smart way to do that?

EDIT Great answers, folks - and I wanted to follow up with two other bits of information. I do not qualify for the deduction and my thought was to "get around" any cash advance or transfer fees by basically charging my monthly expenses to the card, putting the cash towards the student loan.

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3 Answers

up vote 4 down vote accepted

The are several issues you need to consider:

  • The rate is not guaranteed to be fixed. If you are even one day late the interest rate can jump to 24%.
  • Minimum Payment. Most credit cards expect you to pay 2% per month. That may make you monthly payment to the credit card more than you loan payment
  • There is no going back. If you want to switch back to a student loan you can't.
  • This will be a cash advance/balance transfer. Understand all the fees associated with the transfer.
  • Can you get a get a credit line big enough? many people owe 10K to 50K in loans.
  • Tax implications?
  • Forgiveness programs. Some employers will forgive parts of the loan, or if you work in public service for X years they forgive some of the loan. They will not view the credit card debt the same way.
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It doesn't make sense. You can deduct qualified student loan interest from your taxes, you cannot deduct credit card interest.

If you cannot take this deduction and don't have expectations of being able to in the future - then it would make sense, but do consider the credit card APR potential changes. Also, credit card might consider that to be a cash advance, which usually have much higher APR's.

Here's the pub on student loan interest deduction.

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I was gonna point out the cash advance part. I bet that number is closer to 20%. Killer! –  MrChrister Jun 19 '12 at 23:13
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@MrChrister Actually it is most likely to be considered a balance transfer which may or may not carry a fee. Many banks will even give you checks and treat them as a balance transfer even if you write them out to your self and cash them (Citi, Capital one, just to name a few). Good call on the deduction littleadv defiantly something I would have overlooked. –  Kirill Fuchs Jun 19 '12 at 23:31
    
@KirillFuchs, taking SEE makes marvels..:) You're probably right about the balance transfer –  littleadv Jun 19 '12 at 23:34
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The devil is in the details. The SL debt costs you less than the stated rate on the card even if you are in the 10% bracket. The credit card rate is probably not fixed, when rates rise again, it will likely go up. If you want to get rid of the loan faster, pay it off faster, i.e. make higher payments each month.

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You don't need to itemize for student loan interest deduction –  littleadv Jun 19 '12 at 22:51
    
Edited, and right. Brain cramp. Thanks! –  JoeTaxpayer Jun 19 '12 at 23:06
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