Record Of Special Events: Reader Question: Find Better Loan to Pay Off Student Loan?

Tuesday, March 17, 2009

Reader Question: Find Better Loan to Pay Off Student Loan?

Occasionally, readers email me with questions about their own personal finances. Considering I share so much of my own, it’s always interesting to get a peek into the issues other people are concerned about. In fact, right now, I am actively seeking reader questions to serve as launching points for a discussion I plan to have with Ramit from I Will Teach You to Be Rich.

I always remind people that I am not a financial professional, and whenever seeking free advice, you get what you pay for. But that doesn’t mean I can’t have some opinions or thoughts, and by sharing questions with Consumerism Commentary readers, we can usually come up with some good suggestions.

Here is the latest question I received, from Gerry:

I currently have two rather large students loan. One at $30,000 (4.5%) and one at $15,000 (2.5%). I pay about $300/month towards the larger one and $125/month towards the smaller one.

I was wondering if any bank might ever offer a 6 month or 12 month loan at a lower interest rate. Could I take a $2,000 or $3,000 loan and throw it at the larger loan and pay the bank back instead. Would this even make sense for me?

Note: I am also in school, so my loans are in deferment, but I still make the above payments.

The reader is off to a great financial start by beginning to pay off deferred student loans while still in college. In most cases, students do not need to begin paying off student loans until six months after they end their enrollment (preferrably at graduation), so this head start will be beneficial when living expenses increase a few years down the road.

It’s hard to find better deals for borrowing than student loans. There is only a low probability of finding a bank that will offer a loan at a lower interest rate than 4.5% to pay off an existing loan. If finding a rate lower than 4.5% is important, I would suggest using your “social capital” and ask for the money from a relative. This is a risky proposition; personal loans can be dangerous for the health of the relationship, so this is an option one should consider carefully.

Students with deferred loans have the flexibility now not to make payments if they are causing a financial strain. I would consider taking advantage of that flexibility when it is available. While it’s admirable to pay off the loans early—no debt is “good” debt—student loans are deferred because it allows students to focus on their education rather than trying to find work to create an income.

Am I off the mark? What advice would you give Gerry?

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