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A new twist

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This morning I shared the exciting news that I’ve finally paid off two more of our debts! YAY!!!!

I’m sure many of you wonder(ed) what this means in terms of our order of debt attack. Which debt will we target next?

Financial folks have made a strong case for turning our attention to the student loan debt (due to the super high interest rate). I’ve maintained my opinion that the car loan debt is more personally motivating and, therefore, my favored option.

About a month ago I finally broke down my largest student loan debt into all of its constituent parts, showing you exactly how high each debt is and what its associated interest rate is (see here).

I studied all our debts, interest rates, etc. After much thought and consideration, hubs and I have decided to do something a bit drastic with my highest interest rate student loan that is sure to be a bit controversial.

We decided to do a balance transfer.

Yep.

The deed’s already been done. I called all my credit cards to see whom would do a balance transfer on a student loan (many will not), and found that my Capital One card would be willing to do a transfer at 0% APR for 12 months, with a 2% initiation fee. I sat on it for several days, called back 2 separate times to ask about getting a reduced initiation fee (which they declined), and finally decided to do it anyway. My highest APR student loan is 8.5%, with a balance of $5,820.95. To this I’ve added the initiation fee ($116.42) for a total balance of $5937.37. To pay this in full within 12 months I’ll be adding a $500 monthly debt to my debt list (in addition to my other student loans, the last remaining medical bill, and my car loan).

Being that I’ve knocked out so many other debts, I feel completely comfortable with the 12-month timeline. There is absolutely nothing that will prevent us from being able to pay this loan in full by the time April 2016 rolls around. In the meantime, I’ll also continue paying extra on my car loan, while paying lower amounts (just enough to cover interest) on my remaining student loans.

I like this balanced approach for several reasons:

  • It gives me a smaller, more manageable-sized debt to deal with.
  • It will save me hundreds of dollars in interest.
  • It makes it easy to pay extra toward this single loan (instead of having to call Navient every month to try to apply funds toward this account, I simply apply money toward my Capital One card online, which is super easy since I also have a Capital One 360 account <<refer a friend link).
  • It allows me to continue making big progress on my car loan (which is my personal preference) while also simultaneously making big progress on my highest interest rate student loan (which is the more financially sound decision).

Now, I want to acknowledge that doing a balance transfer to pay off a student loan is inherently risky. Stephanie from Six Figures Under has actually written several posts on the topic that I think do a great job of explaining the pros and cons, and in ultimately defending her position of doing the same thing (she and her husband have now successfully paid off one balance transfer and have just initiated a second balance transfer).

Doing a balance transfer to pay off student loan debt is not for everyone. I’m in a unique situation in that I have a lot of extra wiggle room in our debt payoff budget. Our minimum payments are now down to $478/month (that’s $453 minimum on student loans, and $25 minimum on medical bills; I have no payment due on the car loan until April 2016). My goal is to keep paying $2,000+ toward debt each month. But if we got in a bind, it’d be very easy for me to reduce extra debt payments in favor of getting this balance transfer loan paid off quickly.

So there’s my reasoning and rationale about the topic. I fully understand that some of you will simply be against balance transfers no matter what (and it’s your right to have whatever opinion you want on the matter). But for me and my family, this is the right choice. I’ll finally be taking my student loans off the back-burner to become a bit more of a priority. I’ll simultaneously continue making big strides with my car loan debt and will continue chipping away at our other remaining debts. I’ll also be saving a ton of money on interest. It’s a win-win-win all around!

Have you ever successfully completed a balance transfer before? What was your experience like?

Ashley

Texan at heart; Arizonan on paper. Lover of running, cheese, camping, and family (fur-family included!). Blogger, motivated to get out of debt YESTERDAY! Follow along with my journey!

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28 Comments

  • Reply Angie |

    Just do it! With high risk comes high reward. For my interest rates on my student loans, I’m not sure if that would work (plus I don’t have to jump through the hoops you do to overpay) but I know you’ve got this.

  • Reply Juhli |

    Good decision! Once you knock this loan off you can move on to the next highest one and keep making progress until the student loan mountain doesn’t seem so high.

    • Reply Ashley |

      That’s my hope! I’ve discovered I really need to separate/isolate single loans in order for me to feel like I can tackle them! The $95,000 debt is way too high of a mountain to climb. But $6,000 is totally manageable!

  • Reply DIY$ |

    Congrats on paying off some of the smaller debts, Ashley!

    Even though you won’t be saving all that much in interest, it should be a good move since you’re intensely focused on paying on paying off debt already.

    I hope it continues to work well for you!

  • Reply Babs |

    Ashley

    Whilst some will not agree with your new plan of attack at least it is a plan and you have proved frequently that you operate better when the plan is something you believe in. Keep up the fantastic work you are doing.

    Babs

  • Reply Joe |

    Great decision! You’ll save (as I’m sure you already calculated) nearly $400.
    2% transfer fee is great, many cards are 4% or more.

    Also, most cards will let you initiate a balance transfer without knowing what the money will be used for, i.e. they will mail you a check for your requested amount (up to your credit limit of course).
    So, next year, look around again and see if there is another deal that makes sense. Biting off chunks that are reasonably sized will save you money and keep you motivated (no better motivation than the prospect of paying a lot of extra interest!). To be extra safe, you can decide to limit the amounts to, say, 50% of what you have on hand in savings, just in case you do need to bail for whatever reason…

    • Reply Ashley |

      We actually do have a little over half of that in our savings (I’ve called it 3-6 month savings, so I’d hate to use it for a bail out on balance transfer, but its there if disaster struck). Also, I calculate it at way over $400! That’s just because the hassle of dealing with Navient – I feel like I’d make extra payments, which would be applied equally to all of my loans (not this one), and this specific loan would probably be around for MUCH longer than a year…continuing to accrue interest the whole time. If that’s the path we’d been on, then who knows how much interest it would generate (and therefore, how much we’ve saved!)

  • Reply Angie |

    I think this is a great decision. I did balance transfers when we were knocking out our 8% car loan. And again when we were working on our 8.6% student loan. I am glad you picked a smaller chunk ~6k instead of maxing it out. That makes it a lot less stressful. I think I did ours with 20k+ and I was definitely just hoping nothing devastating happened in the 12 months!.

    Two major things to note: To avoid them applying any interest due to technicalities.
    1. Make sure your autopay is set up to minimum payments. If the card was not set up for autopay previously I would manually pay the first month just to make sure it goes through.
    2. Plan to pay the balance off at 11 months versus 12. This will make sure they don’t play any games about the 12 months (12 statement months, 12 months from date of transfer, etc. too much room for interpretation).

  • Reply scarr |

    I think this is a good decision for you. I am usually quite leery of balance transfers – from personal (irresponsible) experience – however I do believe you are disciplined enough to pay this off in a timely manner. Good luck!

    • Reply Ashley |

      I totally agree – balance transfers can be a slippery slope. If we were in the same position we were in 2 years ago I wouldn’t do it (because I wouldn’t feel confident it could be paid in full by the time the year was up), but it definitely felt like the right move at this time in our lives.

  • Reply Walnut |

    We used a balance transfer when I found out my husband’s car loan was at an atrocious interest rate. It’s certainly not a path I liked using, because it would be so easy to hose up the good deal and end up in a far worse off position.

    Just to clarify on which debt you refinanced – is this one of the subloans from the Pandora’s box post? Or is it one of the student loans that it always listed on it’s own in your monthly breakdowns? It seems like you had a fairly low balance but high rate student loan that’s always been listed on it’s own.

    • Reply Ashley |

      This is the first loan from Pandora’s box.
      I also realized I’ve been misspeaking when I talk about my student loan minimum payments. The lowest student loan (my federal loan – the one always listed on its own) is only a $16 minimum, but I’ve been making an extra $100 payment every month (for $116/total). I had factored my “minimum” loan payments with paying $116 toward that loan (not the true $16 minimum). BUT, I do plan to continue paying over on that one too (my only other 8.25% APR loan). So it won’t be as aggressive of payment as this balance transfer (which I plan to pay $500/month toward), but still paying ahead of schedule.

      • Reply Walnut |

        It definitely makes sense to pick off these higher interest debts earlier from a financial perspective. While I completely understand wanting to continue to get rid of the car (probably more than some others here), it’s hard to look at some of the smaller balance/higher rate student loans and not encourage you to just pay them off in a chunk (Such as the $2215 unsubsidized loan from the Pandora’s box post – it’s so much smaller!)

  • Reply Theresa |

    I think it is a good move. Just to have the flexibility to pay above the minimum payment without jumping through a million hoops makes it worth it.

  • Reply Scooze |

    I think this is great for you. I’m surprised a bank would do it but you must have fantastic credit. By making it a consumer loan, you have many more protections. The only thing that could be of concern is the interest rate, so you’ll have to manage that.

    But if you fall on hard times and default, you’ll have to pay a higher interest rate. if it stayed a student loan and you default, you’d be in a world of hurt.

    • Reply Ashley |

      My credit has definitely improved a lot across the course of the last year (when I first started blogging my debt-to-credit ratio wasn’t good so I was in the “ok” range…as I’ve paid down debts I’ve moved up to the “good” range – all according to credit karma). There are definitely concerns with making a federally-backed student loan into a consumer loan. But I think starting with a relatively low balance will help me get my toes wet and see if this is a path that works for us. My hope is that it will prove much easier than dealing with the student loan company (both in terms of making extra payments, and also the psychological aspect of it just being such a small balance compared to my lumped student loans).

  • Reply Klm |

    I think this is a reasonable approach, mostly because you are so on top of watching your money and planning your payments. See how the year goes, and if the payments are manageable while still meeting your other goals, do another one when this one is done. If you didn’t like the process, then you can go back to paying through your loan company.

    • Reply Ashley |

      That’s what I was thinking. I started with a low enough amount in the balance transfer that I feel 100% comfortable with it. After seeing how it goes for the year we can decide if we want to up the ante (transfer a larger balance) or maintain status quo. But by the time the year is up I’m also hoping the car loan will be gone so it will be a lot easier to get super aggressive with the student loans!

  • Reply Jen From Boston |

    When I carried credit card debt I transferred balances, but then I’d fail to pay them off before the higher rates, AND I would rack up more debt.

    I lacked the discipline needed to make balance transfers work for ME.

    But, if someone has the discipline to take advantage of balance transfers I say go for it!

  • Reply Jan |

    I think you can manage a balance transfer, they work if you have the discipline to stick to the payments and not add any new debt. I have done one balance transfer and am planning another, so far it’s going well. I agree with Angelas advice above – automate minimum payments and pay if off a month early.. You’re doing great!

  • Reply Judi |

    Great job on the debt pay offs this morning! And I think the balance transfer is perfect for your situation! In a few months you may need another small win in the marathon of paying off the car loan and this is a totally manageable little chunk. If it works out well for you its a great start to chipping away at the student loans!

  • Reply AS |

    I hope the balance on this card was 0 to start. And you shouldn’t use this credit card for anything else in the next 12 months, and make the minimum payments. Otherwise, they credit your payments to the lower\st APR (ie 0%) and new purchases start to rack up interest at the regular rate (12%, 15%, whatever your rate is). Stick to that and you should save a little money as you were hoping!

So, what do you think ?