1.       Are you kidding me? Look at the interest rate!

First off the highest interest rate I have ever paid to a credit card company is 1.7%. In fact I have not paid a penny of interest other than that of my student loans (paying interest to department of education) since January 2014. I have been indeed borrowing negative interest money to pay off my student loans and max out my retirement savings. So why would anyone choose, in my shoes (I was class 2014), 6.8% interest rate over negative to 1.7% interest rate debt? I know there’s stigma and fear associated with credit card debt, but to me what’s more scary is debt snowballing at 7% interest rate while I sleep, work, eat…

Federal Student Loan Interest Rates (fixed)

July 1, 2016 to June 30, 2017 July 1, 2015 to June 30, 2016
Direct Stafford Loan – Subsidized
(Undergraduate Students)
3.76% 4.29%
Direct Stafford Loan – Unsubsidized
(Undergraduate Students)
3.76% 4.29%
Direct Stafford Loan – Unsubsidized
(Graduate/ Professional Students)
5.31% 5.84%
Direct Parent PLUS Loan 6.31% 6.84%
Direct Graduate/ Professional PLUS Loan 6.31% 6.84%
Perkins Loan 5.00% 5.00%
HPSL
(Health Professions Loan)
5.00% 5.00%

2.       The origination fees.

Check out the origination fees! It’s higher than credit card balance transaction fees. Now, the balance transfer offers I had gotten throughout medical school included 1% transaction fee for 15 months balance transfer checks at 0% APR. To put in plain language, private banks were charging me 1% up front for me to borrow money up to my credit limit for 15 months interest-free. So what is the true cost/effective interest of such a debt/offer? 1% divided by 1.25 years = 0.8%. You can see it 2 different ways to compare apple to apple.
One, balance transfer has $0 origination fee and effective 0.8% interest annually vs. student loan with 4.27% transaction fee (which becomes your principle the moment your loan disburses) & 6.8% interest rate.
Two, balance transfer has 0.8% origination fee and effective 0% interest annually vs. student loan with 4.27% transaction fee (which becomes your principle the moment your loan disburses) & 6.8% interest rate.

No matter which way you look at it, I can’t see anyone say student loan is a better deal than credit card debt.
Nowadays, my balance transfer offers are either 0% transaction fee for 15 months of 0% interest rate, or 2% transaction fee for 14 months of 0% interest rate. Still beats the federal student loans.

Federal Student Loan Origination Fees

October 1, 2015 – September 30, 2016 October 1, 2014 – September 30, 2015
Direct Stafford Loan – Subsidized
(Undergraduate Students)
1.068% 1.073%
Direct Stafford Loan – Unsubsidized
(Undergraduate Students)
1.068% 1.073%
Direct Stafford Loan – Unsubsidized
(Graduate/ Professional Students)
1.068% 1.073%
Direct Parent PLUS Loan 4.272% 4.292%
Direct Graduate/ Professional PLUS Loan 4.272% 4.292%
Perkins Loan 0.00% 0.00%
HPSL
(Health Professions Loan)
0.00% 0.00%

3.       The rewards/incentives of charge on credit than to ask Uncle Sam.

Now, let’s talk about borrowing negative interest money from credit cards to fund your education rather than paying 4.3% loan origination fee with 6.8% interest accrual on what you borrowed + the origination fee.

In medical school, when I charge my trimester tuition of 15k every 4 months, I make anywhere between $150-300 cash back, even more if I redeem the points for gift cards, flight mileage rather than cold cash. If I were to borrow from Uncle Sam the same 15k for 4 months of medical school education, I would have been charged $600 origination fee, and have a debt principle of $15,600 snowballing at 6.8% interest rate the minute the loan disburses (it is a few days later when I get the check and cash it.) So $900 difference up front, then either I ride the 0% interest on credit cards for 18 months, or I let the 6.8% interest from Uncle Sam crush me for the same 1.5 years.

What would you choose if you were I?

4.       Banks compete, you win.

Discover, Bank of America, Wells Fargo, Chase, Citibank, American Express, just to name a few were competing for my debt, hoping to bait and switch on me (i.e. bait me with introductory promotional interest rate of 0% then switching to 17% after promotion ends.) When bank competes, borrowers win.

Now, do you know how many competitors are against Uncle Sam? Nada, zero, zilch.

As Uncle Sam monopolize “federal” student loans market, they charge whatever they like. While private banks can borrow 0% interest rate (prime rate for a while as you recall), from feds/ (tax payer dollars from you and me), Feds decided arbitrarily to charge those who want to advance their education 6.8%. You see where our national value lies, clearly in business, not in education.

Because of all the banks competing to bait and switch on me, I never ran out of offer. As I write right now, I have $0 student loans, $0 consumer/credit card debt, and the only debt I will have in a few weeks is the mortgage of my 2nd/dream home. I still get 10+ credit card balance transfer offers, as the banks hope that I will bite their bait and stick around for the switch.

While these banks are the same faceless corporations who charged my dad 30% interest rate when he missed a payment 10 years ago, I don’t feel bad to fund my education with their negative to 1.7% interest rate loans.

5.       When things goes really really badly, student loans stay, credit card debt is discharged in bankruptcy.

What’s the message here? Don’t mess with Uncle Sam. While I paid back every penny I owe (principle + interest) to Uncle Sam and private banks. White Coat Investor raised a good point… “I even thought to myself, well, what if you just left all that debt on the credit cards and just declared bankruptcy at the end of medical school? Student loans don’t go away in bankruptcy, but credit card debt sure does. By the time you get out of residency 3-5 years later, that bankruptcy is almost off your record. Unethical? Of course. But geez, I can’t say it wouldn’t be tempting when staring a $400K student loan in the face.”

While per my personal moral standards, I will not advise anyone to do the above, neither did WCI intended to encourage intentional bad debt. What I do see though if a PGY3 gets disabled and no longer can finish medical training or practice medicine at all, yet he/she has 400k of student loans at 7% interest rate from the feds. He indeed would have been better off to have these debts on credit cards and file bankruptcy.

What do you think?

In short, I’m way more scared of borrowing from Uncle Sam, the monopolizer of government issued student loans, than borrowing from credit card companies/private banks in a highly competitive market, favoring consumers.

My Debt is Better Than Hers: 5 Reasons Credit Card Debt Trumps Student Loans

3 thoughts on “My Debt is Better Than Hers: 5 Reasons Credit Card Debt Trumps Student Loans

  • November 25, 2016 at 6:33 am
    Permalink

    I owe $160k in student loans and I’m 10 years into practice (as a highly taxed hospital employee). I had five kids by the time I finished residency and I’m not married (and have no child support income). My first student loan came due the same month the my oldest (of 5) kid’s first college tuition was due. He graduated and has about 26k in school debt and about 10k of my loan debt includes parent loans that I took out for him. Last year, I refinanced my loans so they are all rolled together and I pay $410/month with a graduated payment plan. Yes, I still have 29 years to pay these suckers off. I have other debt including a 50k personal loan used to get out of a house I owned), and about 30k in credit cards. I have 4 more kids to put through school. My oldest daughter is on her own and in school and also has a baby. That means that she doesn’t have to use my income for her FAFSA and she gets several grants. She has maxed out her Federal Subsidized loans and I’ve covered about $1000/semester to avoid her having for use unsubidized money. My three youngest daughters will be starting college in 2, 5 and 6 years, so I’m looking at paying for college for the next 10 years at least. I would really like to help them use this methodology but I have been a terrible financial role model for them and I worry they will lose track of the credit cards they are using so they may not do the switch and end up incuring the interest. Or worse yet, use the credit cards for something other than school. I’m going to try it though. I think I will have them add me as a user on the account so I have access to check on balances and make changes.

    You are my new favorite blogger. I found you via the post from White Coat Investor about his favorite doctor blogs. Keep up the good work and tell Mini nice job the YouTube video where she explains long division. What a great employee 😉

    Reply
    • March 20, 2017 at 10:39 am
      Permalink

      Hi Shannon,

      Thank you for sharing. I’m sorry my sister was not able to get back to you. Best of luck to you and your kids.

      -Elva

      Reply

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