25 Apr Using Your Line of Credit to Eliminate Student Loans – Part 1
Note – This article was written in 2014. This means the original loan is now two years older. Consequently, if you are just starting now your interest savings will be less.
Most of my posts have focused on getting rid of mortgages. How does CashMap’s Line of Credit Strategy work if you don’t own a home and you’ve got student loans?
A College Graduate’s Profile
You’re a recent college graduate. In our example, you graduated from college almost three years ago and while you were working full time, you worked on getting your Masters. You’re just about finished. Your loan payments are about to begin.
After your deductions for your 401K or RRSP (Canadians), medical insurance and taxes, you deposit $1,425 in your bank account. Your expenses total $2,394 each month leaving you with $452 in positive cash flow. You have $48,290 in student loans with interest rates ranging between 3.4 to 6.8 percent interest. Your monthly loan payments total $538.53 over ten years. Your largest loan is $32,842 with an interest rate of 6.8 percent. You’ve managed to save about $5,500. This is almost two months living expenses.
Can You Get a Low Interest Line of Credit?
If you’ve consistently paid your bills on time, you’ll be surprised to learn that you may already have a high FICO score. If you shop around, you’ll be able to get an unsecured line of credit of $4,000 at an interest rate of 7 percent. It doesn’t seem like much; however, this is all you need.
Your Line of Credit Student Loan Solution
You’ve decided that you want to continue to save $200 each month. This is just under 45 percent of your positive cash flow. Since you’re young, you can afford to invest more aggressively. You assume you’ll earn eight percent on your savings. Since your largest loan also has the highest interest rate, this is the loan you want to get rid of first.
If you begin making payments on your loan this month, CashMap’s Line of Credit solution shows you that you can have your largest loan paid off by Feb 2019, you’ll save $6725 in loan interest and in fifteen years you’ll save $224,212. By the time your loan is paid in full, your savings will total $24,982. Not bad!
The updated loan CashMap Solution allows you to have the loan paid off on June 1, 2020 with cost savings of $6,641
In my next post, I’ll walk you through the steps I used to create this solution.
Thanks for joining me. I’d love to hear from you. Please send your questions, topics or suggestions to dennis@cashmapconsulting.com. You can also follow me on twitter at cash_map.
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