Dig Yourself Out: Reduce Credit Card and Student Loan Debt

The truth is - it can be hard to dig yourself out of a financial debt hole.  

Most people do not like to owe anything to anyone, let alone deal with the emotional strain that comes with feeling like you're stuck in a hole.  We all incur debt to get access to money for reasons that make sense at the time – education, a home, kids, healthcare, the pursuit of dreams, unforeseen circumstances. Or, maybe you did not want to part with your cash, and so you racked up debt instead.

There is no judgment for how you got into debt, nor why you’re still in it.

However, my hope is that you have a plan of attack for getting out of that debt hole which is crippling your ability to do other things, such as investing, starting a business, or taking a vacation. When the debt reflects a much higher cost than the original purchase, an alert should be going off in your head. You should continually ask yourself this key question:

Is there a way to lower the interest rate on my existing debt?

The savvy financiers are answering this question with a resounding "yes" by taking advantage of recent innovations in financial products. I do not want you to be out of the loop. Most people are familiar with the benefits of mortgage refinancing to lower payments on your mortgage debt, so I will not focus here today. But, I will focus on lowering payments on the other big kahunas - student loan debt and credit card debt.

Credit cards. I do believe that a credit card balance transfer is a smart way to lower the interest on your credit card if done properly. However, if you’ve already pulled this trigger, or do not want to experience a jump in the rate after some short introductory period, consider taking out a personal loan. In recent years, several financial companies like Avant, Lending Club, Prosper, and SoFi have created whole businesses by offering personal loans to consumers to pay off credit card debt.

Of the companies, SoFi is the only one that lets you borrow more than $35,000 and caps its interest rates at 10%. (Full disclosure – I have a paid brand ambassador relationship with SoFi. I only establish these relationships with companies that have products that I truly believe in and would use myself). SoFi customers tend to have higher credit scores than the other companies, so if you have great credit, you can see what rate you qualify for without any affect to your credit. I did apply for personal loans at Lending Club and Prosper just to see what rate I would get, and I could not get anything lower than 15%. I encourage you to shop around, let the numbers speak for themselves, and make sure the customer service is top notch. If your findings are good, let me know.

The logic is simple – you get a lower interest rate personal loan to pay off a higher interest rate credit card. Such a strategy is similar to a mortgage refinance but in this case, a separate company gives you the personal loan. So, let’s say you have $50,000 in credit card debt with an interest rate of 18% and you qualify for a personal loan for $50,000 for 6%, which is two-thirds lower than your current rate. What you can do is take the $50,000 and pay off the entire credit card balance. You now owe $50,000 on a personal loan at a much lower interest rate and can plan a term you want to pay it back. When you determine a term such as three of five years, you now have a plan of attack with a predictable monthly payment to hit.

Student loans. If you can refinance your student loan, you can potentially save thousands in interest over the life of the student loan by lowering the interest rate. The BEST time to refinance a student loan is right after you graduate. This is because refinancing basically gives you an entirely new loan. Remember, loan payments are allocated more toward interest (and less toward the principal) in the beginning years of a loan repayment, so if you reduce the interest rate at the beginning, you will prevent yourself from paying a lot in interest already. If you wait even a few years after graduation to refinance, the benefits of the refinance are not as great.

For example, if you refinance right at the beginning of a 10-year loan repayment cycle, you do so without having paid any interest. If you refinance with 7 years left on your loan, you will already have paid a lot in interest in your first three years, and then get a new loan for potentially another 10 years. As a result, even though you lower the interest rate, you effectively are paying 13 years worth of loans, which means more payments to potentially offset any gains from the lower rate. Now, you could get a new loan for 5 years, but then your monthly payment will be higher (even with the lower rate) because of the shorter repayment time.

The major players in the student loan refinance market are Citizens Bank, Common Bond, Earnest, LendKey, and SoFi. (Full disclosure - I have paid brand ambassador relationships with CommonBond and SoFi because I believe in their products). Again, I encourage you to check them all out and let the numbers speak for themselves and make sure the service quality is HIGH.

But if you like other benefits, CommonBond and SoFi might be up your alley. Through its social promise program, CommonBond funds the education of a student in need abroad for a full year for every degree fully funded on the company's platform. Through its entrepreneurship program, SoFi offers loan deferment, mentorship, a peer network, and access to its investors for budding entrepreneurs.

What to do?

Regardless of which way you go, it is important to know that you have options. Take advantage of the potential to lower your interest rates by smartly using financial products to your benefit.

Trust me, you will be happy with your newfound freedom after digging yourself out of the debt hole!