About a month ago, I wrote an overview about using credit card balance transfers to help you pay off debt. If that’s a new idea, you’ll want to read that post first. I want to share our personal experience with using a balance transfer to pay off student loans.
Last July, we used a credit card balance transfer to pay off $11,000 of federal student loans. We went in with our eyes open, knowing the risks and catches of using balance transfers in debt repayment. Even so, there were some lessons we learned.
We paid off our balance transfer last week, well before the introductory APR period was over, just as we had planned. Here are the three lessons we’ve learned from leveraging a balance transfer to pay off student loans to save on interest.
1- Wait for the right offer
We hadn’t seen balance transfer offers in ages, let alone 0% APR balance transfers, so we thought they were extinct. When a balance transfer of 2.9% came along it looked great (to my husband, I am usually more conservative), considering that was less than half of the interest rate on our student loans. It helps that it came from USAA, which my husband loves. We jumped on it.
Not three weeks later we received another offer from USAA for a 0% APR balance transfer, plus it had no transfer fee! We have since received several other 0% APR offers.
Even better than just waiting for the perfect offer to come in the mail, take some initiative and call. Ask “is that the best you can give me?” USAA has been great to work with and surely would have given us a better rate if we had only asked!
2- Watch out for the transfer fee
When we made our transfer, the fee was 3% of each transfer with a maximum of $75 per transfer (most are just 3% with no max). We had planned to transfer $11,000, so we were excited that the $75 max would be much less than 3% of $11,000, which is $360.
The problem came when made the transfer. We wrote the balance transfer checks out to ourselves to deposit into our checking account and then we planned to pay the student loan from the checking account. Well, our bank has a maximum of $10,000 electronic deposit per day, so without thinking twice, my husband wrote and deposited a check for $9,000 the first day, and another check for $2,000 the next day. Well that makes two transfers, which means we were hit with a $75 fee and a $60 fee. That’s almost double what we had planned on in our calculations.
3- Keep the card separate
Make sure that you aren’t making new purchases on the card. That was our plan, but we had some automatic payments set up with that card since it was our regular USAA Mastercard that we had had for ages rather than a brand new credit card just for balance transfer purposes. Sorting out the interest from the balance transfer and new purchases, as well as figuring out where the payments were being applied got a little messy at times.
Would we do it again?
Probably. Only next time we will be even smarter. We will wait for (or ask for) the offer we want, be careful with the transfer fee, and keep the card completely separate from our other credit card transactions.
The numbers for the transfer make sense. If we had not made the balance transfer, but paid the same amounts on the loan, we would have paid a total of $378 in interest over the 11 months. With the balance transfer, we paid only $153 in interest over the 11 months. However we also paid $135 in balance transfer fees, shaving our actual savings down to $90. Finding a 0% interest transfer with no balance transfer fee, we would have saved the full $378. That’s what we’re looking for next time.
UPDATE: We DID do it again. We used a credit card balance transfer to pay off another $15,000 of federal student loans. It worked out even better the second time around. You can read all about it here!
It’s Your Turn!
- If you’ve used a balance transfer before, what have you learned?
- Would you consider using a balance transfer to save on interest? Why or why not?
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The idea of this is good. It’s also important to factor in the tax deduction you have lost on student loan interest. Depending on your tax bracket, you could have saved close to $100 without doing the balance transfer.
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I stumbled onto your site while searching for “0% Apr loans to pay a portion of my students loans”. A credit union (through my current employer) is offering 10,000$ loans with 0.0% for 36 months. This is a one time load available thorough my employer and will be paid directly to me. I am considering to payoff a significant portion of my student loan.
I was under the impression the Department of Education would not let you use a credit card to pay federal student loans unless you proved that this was the only way you could afford payments. Did you run into any trouble trying to do this? I was considering doing the same until I read that federal student loans were not eligible.
Hi Maggie! You can’t actually use a credit card to pay your student loans. With the balance transfer, you write a check to yourself, then when that money is in your bank account, you use it to pay your loans. The loan servicer receives a check from you. And you are on the hook for the credit card payment which now includes the check you wrote to yourself. This is perfectly legal as long as you really intend to pay your credit card and not intend to declare bankruptcy.
I just revisited this post today after my husband had the wonderful news that he has a new job!
We recently (a month ago) received an offer for a 0% for 12 months check up to $6500. I briefly mentioned to the hubs that we should consider using it to finish off the student loans, and he said we could discuss it more once he knew that he had landed a new position. So now that he has a new job we crunched the numbers and decided that we would do it. We are currently at $6800~ in student loans at between 4.55%-6.25%. We are paying about ~$48 a month in interest. We are going to write the check for $6000 and pay off the remaining balance out of savings. There is a 2% fee ($120). So if we would have paid off the student loans in 12 months with interest it would have been $576. Minus the $120 fee we will save about $450. We actually would save even more if you looked at the true 10 year note. We will pay a minimum of $520 a month for the 12 months. It will affect our budget drastically for the first six months or so, but it will be soooo worth it!
I’m glad that your husband has a new job!!! That’s great that you are so close on your debt! Thanks for sharing all the numbers and calculations. Saving $450 would definitely make using a balance transfer worth it in my opinion. I’m excited to see you in the final stretch of your debt CeCee!
We did something similar, taking out a 401k loan to pay down our mortgage enough to get rid of PMI. We actually pay more in interest now (~$50/month after accounting for taxes), but we save the $98/month we were paying for the PMI premium, so it still nets out pretty well.
That’s a creative one! I’m glad you got rid of PMI and have a net savings! Thanks for sharing!
I would definitely consider this approach. We have quite a few student loans that we are slowly paying off and it would be great to save some on the interest. As you said there are risks with this strategy and I would probably take a fairly conservative approach if I used this strategy (i.e. really make sure I do not transfer more than I know I can pay off in a certain amount of time).
If you’re going to do something like this I would definitely stick with a conservative approach.
When I was much younger I played the balance transfer game and it just didn’t work for me. I wasn’t responsible enough at that time to deal with it. I ended up running up the old account and the new account :/
If it was going to save me a substantial amount of money I would consider doing it again BUT it would be a last resort for me.
If we had a bad history with balance transfers (or credit cards generally), I would probably save this method as a last resort or avoid it altogether too. 🙂
We’ve never used a balance transfer, but this is a really interesting way to look at the costs and the benefits. Also….I love USAA, they’re great for so many things!
Yes! We have USAA car insurance, renter’s insurance, checking account, savings account, and a mastercard! They have always been great to work with. 🙂
When I paid off my student loans I did not use a balance transfer, only cash. I was not one of those people who had the discipline to not use the card. My only choice was cold turkey from credit.
Now whenever we are getting ready to make a purchase or spend money I consult the “DAVE RAMSEY” theory! He really has helped our families financial situation so much. Before this I used transfers with 0% consistenly and it was my own fault because I thought that it was a great idea. It was the hidden fees on the balance transfers that ended up costing me more money.
Using a balance transfer for paying off student loans definitely isn’t the conventional way, just something we experimented with to save a little on interest. Even so, we still consider it our student loan debt, since that’s where it originated. Since we don’t have payments on our student loans, the difference was that we did have required minimum payments with the balance transfer, but they were all ones that we knew we could make (and were planning on making). We paid off the balance transfer with plenty of time to spare.
I’ve balance transferred from one credit card to another, but never to pay off my student loans. To start with, I have all federal loans, so in case I hit hard times, I could ask for a different repayment plan or deferment – you can’t do that with a credit card. My loans weren’t too bad: 6.55% was the highest, which isn’t that much (and I just paid that one off this morning!), the others were 2.10%, so the balance transfer fees would have wiped out anything I would have saved in interest.
Congrats on getting one paid off this morning! Our loans are federal as well, with about the same rate as yours. We were willing to take the risk since it was our only required payment (we have IBR for the rest of the student loans and don’t owe anything yet, but that isn’t stopping us from paying them off asap). We also only transferred an amount we were sure we could pay off in the intro period.
Very interesting post. Nothing I’ve ever researched or considered because although we have lots of debt, none of it is credit card or any high-interest debt. Our car loans are at 1% (which is why we have no interest in paying them off early) and our med school debt is at 2.5% I believe, and our mortgage is higher but we don’t have extra money to pay toward that, so this post doesn’t really apply to us. However, it was interesting to read and learn about…thanks for the education. I know my sister was in credit card debt for a few years and every year she before the 0% introductory time expired, she would find a new 0% offer and keep transferring it. So she transferred her credit card debt (10K ish) for about 3 or so years before she even thought about paying it off…and she never paid a lick of interest. Not something I recommend (because I don’t recommend having ANY credit card debt whether you are paying interest on it or not) but it worked for her.
That’s nice that your med-school loans are so low! That’s pretty crazy about your sister’s situation. I imagine that she paid a transfer fee each time, and of course she still had to pay minimum payments. That’s way too risky for me though!
I can’t remember if she had transfer fees on all of them (I think for some she did not–apparently credit card companies will go to great lengths to get you to transfer if they think you won’t be able to pay it off during the introductory period!) but I do know that she never had any minimum payments until the year was up, but by then she would have transferred it again, so only minimum payments when she continued to use her credit card frivolously after she had transferred the entire balance. I couldn’t sleep at night if I were her! 🙂
You share some important reminders when it comes to balance transfers.
A few years ago we did some balance transfers using my husbands visa. His normal interest rate was 19.99%. He suddenly received offers that were good for 6 months and 12 months. Some were 0% with no fee, and some had the transfer fee attached to them with 2.9% interest. We moved a lot of money around. I didn’t keep track of how much interest we saved, and unfortunately the low interest rate expired before we paid it off in full. Not a pretty picture, but a good lesson learned.
It sounds like you had to learn the hard way Sicorra. A balance transfer can be really helpful if you’ve got high interest credit card debt, but it takes some serious dedication and a strong plan otherwise it can backfire.
I personally wouldn’t use balance transfers unless it was a no-lose situation or very little risk. Meaning if it was high interest debt, like credit cards at 17+%. By taking a debt that has lower interest (student loans, personal loans, mortgages, etc.) and placing it on a 0% contract is risky. It gives you another “payment” and if for some reason your finances change in the year and you can no longer afford to pay it off or if you have a late payment that interest skyrockets to nearly 20%. Not a risk or stress I am willing to take on to save a measly $100 or $300 (only $25/month).
I’m glad that everything worked out for you and you ended up saving. 😀
You’re right Nichole. It is risky and it’s definitely not something I would recommend unless you are really responsible (and don’t get stressed out easily) and “clean” when it comes to credit cards. I would also be careful about the amount to transfer. We made sure it was an amount that we knew we could pay off well within the time frame. Since we don’t have any other payments due (with income-based repayment, we don’t owe anything on our loans now), we knew we could do it.
Have you guys considered transferring all or a portion of your loans to SoFi? You can currently get a variable interest rate of 2.91%. Maybe a subject for a blog post.
Hi Scott! We haven’t looked at SoFi at all. We’ll have to take a look and see. Thanks for sharing!