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I have several private student loans that aren't eligible for debt forgiveness and with interest rates between 10-15%, for a total of about $30K. I think it would be easier to pay the loan down over the next 5-10 years or so if the interest rate was so lower, so I could make the minimum interest payment AND put more toward the principal. So, I'd like to reduce the interest rate I pay.

I have about $12K in my brokerage account that I can borrow almost the entire amount, AND withdraw it, in cash. The interest rate on margin balances with my broker is 1.58% right now, so I could borrow another 12K, withdraw my 24K from my brokerage account, and significantly pay down some of my private student loan debt and in fact pay off some of the debt with the highest interest rate.

What's wrong with this? I know that interest rates on margin can change, and the interest rates on my student loans are fixed, but I don't think margin rates would get up over 10%, right?

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    Be sure to check if any of your loans have prepayment penalties, which would penalize you if you paid the loan off early. Education loans shouldn't, but if you some of your debt consists of private loans that weren't specifically for education (e.g., private lines of credit that you took out to use for living expenses), this might be a factor.
    – John Bensin
    Apr 11, 2014 at 20:54
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    And if the market (or specifically, your investments, drop 40%, are you going to be in trouble? The best thing about crashes of 2001 & 2008 for me is that I wasn't leveraged.
    – JTP - Apologise to Monica ♦
    Apr 11, 2014 at 21:19
  • I am not sure if you can use a brokerage margin account in this way, can't you just apply for a personal loan at a lower rate to consolidate your higher rate loans, or if you own a home use some equity in your home to get an even lower rate to consolidate your higher interest rate loans.
    – Victor
    Apr 11, 2014 at 21:21
  • @JoeTaxpayer Keep in mind that the funds used as collateral may not be invested in the market; the cash in brokerage accounts is marginable too, so I imagine the OP might be in a similar situation.
    – John Bensin
    Apr 11, 2014 at 21:54
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    @JohnBensin - I don't follow. OP wants a margin loan he'll use to pay the debt. So $20K (for example) will let him pull out $10K on margin, right?
    – JTP - Apologise to Monica ♦
    Apr 11, 2014 at 22:31

2 Answers 2

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Every dollar you invest in paying off your loans earns you a guaranteed rate of return of 10-15%, whatever the loan rate is. Forget margin, which is still debt and only lets you cash a portion of your total equity. (You can't possibly pull $24k in cash from an account with only $12k in portfolio value.)

Liquidate your brokerage portfolio. Use every penny of the proceeds to pay off loan principal. On a risk-adjusted basis, you cannot possibly do better.

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On the one hand, some of the people answering above seem not to understand how a margin loan works. There are no "permissible uses." Do whatever you want with the money -- including go to Vegas and blow it in a weekend.

It is definitely NOT a good idea. You are misunderstanding what margin is. If you had $100,000 of securities, you could borrow up to $100k. However, you cannot ever let the account drop below 50%. So if you took out $50k, you would trigger a margin call, and they would demand money back or start selling your shares to raise revenue.

Let's take a look at a more reasonable situation to show you the danger. With $100k, invested in extremely stable securities, you could borrow $30k. Your margin limit is 50%, so if the value of your securities ever dropped below $60k, you would get a margin call. If you could not pay, the brokerage would sell securities until you were no longer under 50%. The problem there is that they do that just when you don't want to sell. In a downturn, you want to hold on to the securities, because they are going to come back. But if you owe money, you don't get to decide that. Suppose your securities drop in value to $55,000. You get a margin call and they sell $5000. You now owe $25,000 and are below the margin limit. Then the securities come right back to where they were, but now you are missing 1/11 of your securities, or a bit more than $9000.

With a fixed loan from a bank, you pay on a regular schedule. You may pay a higher interest rate, but you do so predictably. That's the way to go.

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    Your example is good, but the line about borrowing $100k against a $100k equity value, not quite right.
    – JTP - Apologise to Monica ♦
    Apr 12, 2014 at 1:28
  • @JoeTaxpayer. You can borrow the 100k and use it to buy another 100k of securities. But if you take it out, you automatically trigger a margin call. Perhaps that's clearer?
    – Dov
    Apr 12, 2014 at 2:04
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    Yes, I know how margin works, on $100K in stock, the OP can pull $50K in cash. We agree on that, right?
    – JTP - Apologise to Monica ♦
    Apr 12, 2014 at 2:06

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