Emily asked:
I’m in grad school and they offered me more loan money than I need for school. But, I’m over 3000 dollars in debt on my only credit card. Is it legal to take out the loan just to pay off my credit card?
I’m in grad school and they offered me more loan money than I need for school. But, I’m over 3000 dollars in debt on my only credit card. Is it legal to take out the loan just to pay off my credit card?
If so, is it a smart idea? The loan is unsubsidized, so interest kicks in immediately.
Emily:
The answer would depend on how quickly you’re able to repay the $3000 credit card debt, and how much interest you are willing to pay.
Let’s take a look:
Suppose the interest rate on your credit card is 9.9%.
If you pay $113.29 a month, you will have paid off that credit card in 30 months. At the end of those 30 months, you will have paid $3398.70 – so that’s the $3000 balance, plus $398.70 in interest.
Let’s suppose you couldn’t pay $113.29 a month – you only wanted to pay $50 a month. At that rate, it would take you 83 months (slightly less than 7 years) to pay off this debt, and you’d pay a total of $4150, which would include $1150 in interest.
Then again, if you are only in a position to pay $50 a month, the Stafford might be the better option. Using a 6.8% Stafford loan, your $50 monthly payment (the minimum Stafford payment allowed) will pay off the loan in 74 months – making your total payment about $3677 – a savings of about $473 over the credit card payments. (and 9 fewer payments).
A couple of things to keep in mind, though…
Don’t overborrow with student loans. The more you borrow, the higher your payments, and the more trouble you’ll have paying them back.
More importantly, though – your Stafford loans are not intended for credit card payment purposes. There’s no audit to prevent you from using them for “off-book” payments, but you will be technically violating the terms of your Stafford loan agreement.
Good luck to you – I hope this helped.