Would You Refinance Your Debt at 7% Interest?


I believe I have the golden opportunity, here. For once, my financial aid finally went through for school, and while I wasn’t approved for “free money” like grants or need-based scholarships, I was approved for federal stafford loans. Not only does this mean I can go back to school in summer, but it also means I will have an extra $3000-8000 to work with, if I so choose. Here’s the deal; most of that is in unsubsidized stafford loans. This means the loans sit there, gaining interest, until I enter repayment. This means a higher initial principal, but I don’t have to worry about high interest rates. However, when you compare that to credit cards, astronomical rates, and generally feeling like a ruined man, I think there is only one path forward.

I’m going to pay off my credit card debt with student loans.

Here’s my train of thought. I pay $300 per month in credit card minimums, normally about $500-600 per month as I can. At this rate, it might only take me a year to finish paying everything off, assuming I can find ways to add to that snowball. So over a year, I’m not really paying a ton in interest rates if I continue this method, but I’m still paying about an extra $1k in interest over that period. And as I learned when I lost my job, nothing is permanent. At any moment something could sweep by and ruin my whole plan. If that happens, I don’t want to be stuck with high interest rates. Enter the student loan. If I still put $500 or more per month toward that loan, it will take me between 11-13 months to pay off the debt, only a few less than my current method. However, the money I pay each month goes largely to principal, and if something happens to wreck my plan (losing a job), I’m not even in repayment yet! Not only will I be able to pay off this loan, but it should free me up to be able to pay off more than this student loan by the time I graduate. Meaning I graduate owing less in student loans than I already do right now.

I think it’s the smart move to make. If my future was certain, I’d just continue my current plan and get it paid off. However, I know with my job comes a direct pay increase once I get my degree, so I can count on making more money when I actually enter repayment. If something does go wrong, it’s effectively like hitting a pause button; I’m no worse off for it. With regular credit cards, they are not too keen on giving you free money. The best case scenario is that I pay off my debt even earlier, and the worst case scenario is that I freeze my debt where it currently is.

Some side benefits are peace of mind, likely a giant leap in credit score, the knowledge that if something happens to my situation I’ll be ok, and the ability to start putting money towards solid investments greater than 7% return (peer to peer lending comes to mind). I can’t think of any downside to this plan. Granted, I technically can’t use student loans to cover debt repayment, but I can use them for food and rent, and then rebudget that money to pay off the credit cards. The net result is that by August, I will have no debt at an interest rate above 6.8%! You can’t touch that type of refinancing with a ten-foot sub-prime pole!

Can anyone foresee any problems with this arrangement?