If you have multiple private student loans that you took out during different semesters, there's a way you can reduce those various interest fees: Transfer some of that debt to a credit offer that has a low interest rate for a set period of time.
Before making the transfer, however, heed these cautions:
- Don't transfer any more to a 12-month offer than you can reasonably pay off in a year because your interest rate will increase afterward on the remaining balance of what you transferred to your credit card.
For example, if you have $300 left over at the end of each month after putting away money for savings, then you can transfer $3,600 to a credit card on a 12-month offer at 0 percent. If you opt for the 12-month offer, go to your bank's Web site and use the simple loan calculator to calculate what balance you could afford with a $300-per-month payment.
- Budget so that you can make payments on the private loan balance you weren't able to transfer at the same time as your credit card payments. You don't want your plan to save you money in interest but cost you a bundle in late fees for delayed payments while you shuffle your debt to make your regular payments on your loan.
Remember, no matter how much you transfer of your private loan, your payment may not drop proportionately. This is because while the principal on your loan drops, you could have your variable interest rate on your private loan rise the next month.
- When budgeting to see how much you could afford to pay off through a balance transfer, don't use your current month's payment. If your interest rate on your private loans rises, you could throw your entire budget out of whack. Remember how your interest rate terms work and calculate what your payment would be if your interest rate jumped 5 percent for a LIBOR-based loan or 6 percent for a Prime-based loan.
- Know what your balance transfer fees are. You won't do yourself any good unless you know exactly what you are paying.
For instance, let's say your 0 percent interest offer comes with a balance transfer fee of 4 percent. If you transfer $5,000, you're charged $200 right off the bat to borrow the money. This is equivalent to the interest you would pay in one year to pay off $5,000 at 7.31 percent interest. Unless your terms currently produce an interest rate that is more than this, you shouldn't be doing a balance transfer.
Always compare the interest that would be charged to the balance transfer fee.