Education is awesome. Student loans suck.
After “partying” in the university library for a number of years, my husband and I found ourselves with a major student loan hangover. Our debt number was so high, that I won’t write it down. But let’s just say it was a lot of money.
We had been dutifully paying back our student loans for years, sending money to whatever loan servicing organization had been assigned our loan that year (Seriously, what is it with the government moving loans from one servicer to another?).
After chipping away at our debt for several years, I decided to go online and see how much debt – and time – was left. When we saw the numbers (17 years!), we almost had a heart attack. At this rate, we would be paying off our own student debt when our kids were in high school (i.e., right when we needed to be saving money to pay for their college tuition).
This seemed ridiculous. And wrong, honestly.
We looked at the loan payments we had been making and saw that a ton of it was going to interest. We also saw that the fixed interest rate was pretty high on some of our loans given the current market conditions.
Then we had an idea. We had been in our bank earlier that week and had noticed that it was offering a HELOC (Home Equity Line of Credit) with a variable rate that was around 3%. Our student loans were at 7-8%, so theoretically if we made the same payments and if the feds didn’t increase interest rates substantially, we would be ahead.
We also had some “rainy day” money in our savings account for emergencies, which was getting almost no interest. I believe the interest was a whopping 0.7%, which is a total joke given that inflation was – and still is – higher than that.
We also noticed that real estate prices in our neighborhood were going up. This meant that our home’s value had appreciated, which also meant that we could probably qualify for a HELOC without having to pull our own money out of our home.
We put two and two together and decided that we would leverage our home and savings to pay off our student loan debt in 9 years; That’s 8 years sooner than we would have been able to if we had done nothing.
We took out a HELOC just for paying off our “expensive” (high interest rate) student loans. We pinky sweared that there would be no dream kitchen or man cave. There would be no awesome new car. Anything awesome and cool was verboten. Our HELOC would be for one completely practical and totally unsexy purpose: paying down our student loans.
Once we agreed to that, we took out a HELOC to pay off our student loans with the government. Since there was such a large spread between our student loan interest rate and the HELOC interest rate, we automatically lowered our interest rate several percentage points, saving us thousands of dollars on interest.
But wait … there’s more!
We saved even more on interest by leveraging our savings: We plowed most of our savings into the HELOC so that our savings were lowering the amount of interest even more. Now, instead of earning a pithy 0.7%, our savings were saving us 3% in interest on our student-loans-turned-HELOC-debt. We could have never done this had we kept our student loans with the Feds, since sending money to them is a one way transaction. Once you give them money, it’s theirs. With a HELOC however, we could take money back if we needed it for an emergency (assuming no significant change in financial standing).
We doubled down by playing a shell game with our income using our credit cards. Every time we got paid, we would take our income and plow it into our HELOC. Then, we would use the credit cards to pay for expenses.
Since our credit cards gave us around 25 days to pay up without charging interest on our purchases, we were able to have our income to sit in the HELOC for about 25 days. During that time, our income lowered our effective interest rate even more by lowering the balance of debt in the HELOC (albeit temporarily). Then, when it was time to pay the bills – we would transfer the appropriate amount of money out of the HELOC to do so.
Anything that was leftover in the HELOC, stayed there.
Our pay down estimate turned into 4-5 years instead of 17. Hallelujah!
What was great about this approach is that in addition to triple dipping (lower interest rate in HELOC, using savings to lower the HELOC debt, and playing the shell game with our income), knowing that the HELOC had a variable interest rate really lit the fire up under us to pay it off faster.
This approach wasn’t without its risks: Transitioning from a fixed to a variable interest rate is risky. Housing your savings and income in a HELOC can be risky. Using credit cards to buy things is risky – it’s a lot easier to spend more money using a credit card than cash. Same goes for just knowing that you have a line of credit that is accessible. You see your neighbors’ renovating their homes and you think, “Ohhhh, that looks so nice. My house could look so nice too. And I have the HELOC…” And then you’re like “No. No. No. Beige underwear! Unsexxy, remember?!”
And then you finally pay it off.
Victory is ours!
Next stop: The rest of the lower interest rate student loans (BLAH). Guess that man cave and dream kitchen will have to wait.