Chipping Student Loans Away through Shopping

New Year’s is just around the corner, and it looks like I’ll get to celebrate fulfilling one of my 2011 resolutions: pay off one of my graduate school student loans! In three years, I chipped away a $15,550 student loan balance, which now stands at just over $200. I’ll use some Christmas money to finish it off, and should ring in the New Year with one less student loan to deal with (but 2 smaller ones to go).

Besides making payments on the loan during deferment, I used two shopping tools to help me work on that loan: UPromise and ThankYou points.

I’ve covered the UPromise program before, but to summarize, it’s primarily based on a shopping portal that gives cash back to users. The cash back balance can then be applied against a Sallie Mae student loan account, transferred to a 529 education savings account, or redeemed for cash. The cash back rate is often not as high as that from Discover’s ShopDiscover or Chase’s Ultimate Rewards Mall, but every so often I come across retailers that are not partners with either of these two but are in the UPromise portal.

Not that credit cards don’t help with student loans. Over the last two years, Citi’s ThankYou points program has been vital to erasing my student loan balance. I have the CitiForward credit card, which offers 5 Thank You points per dollar spent on books, movies, music, and, most importantly, restaurants, and 1 point on everything else. These points can then be redeemed for gift cards and cash, but also cheques to pay student loan or mortgage balances! Until September 2011, to get a $100 cheque, you needed 12,700 points, but since then the requirement has dropped to 10,000 points. There was no official announcement about this change, so I don’t know how long it will last – if you’re sitting on any ThankYou points and have a student loan or a mortgage, now might be the best time to redeem them.

Now, 12,500 ThankYou points trade for $125 in Student Loan Rebates. In April, 12,700 points were required for $100.

Admittedly, at 10,000 points for $100, this is the same redemption rate as for, say, a Banana Republic or a Macy’s gift card. However, I’ve found that it’s a lot easier to spend money shopping than it is to put money aside to pay off my student loan more quickly, so I prefer redeeming ThankYou points for student loan payments since it’s a way to force myself to pay down the loan with money that never made it to my hands in the first place. Besides, the redemption rate for student loans and mortgage payments is much better than for cash: $100 in cash costs 16,000 ThankYou points.

To redeem ThankYou points for student loan or mortgage payments, all you have to do is call the ThankYou network (1800-THANKYOU) and give them your lending company’s name. They will then mail you the cheque, which you can send to your lending institution along with a note with any special instructions on how to apply the payment (e.g., post everything to the loan with the highest interest rate or to the one with the smallest balance). For UPromise, even though the payments post automatically, you can also call Sallie Mae to request a change to how any payment is applied.

With less than two weeks of 2011 left, if you are also aiming to making a big chip on your student loan or mortgage balance, now might be a great time to ramp up the online purchases you make through UPromise or to redeem your ThankYou points for loan payments. The fact that now you only need 10,000 ThankYou points for a $100 cheque not only sweetens the deal but may also be the push you need – it’s not clear how long this new rate will stick around.

And if it’s too late for 2011, here’s an easy 2012 resolution for you: set up and remember to use UPromise or the ThankYou network to get rid of your student loans next year. Good luck, and have fun watching your loan balance disappear!

When Grace Runs Out

For many of you who graduated college or any other tertiary institution this past spring, your monthly fixed costs are about to hike up.  As the 6-month grace period on your federal Stafford loans (subsidized and unsubsidized) comes to an end, it is time to revisit your payment strategies.  Here are some points to consider as you prepare yourself to tackle that debt:

  • Unemployment: If you are unemployed, call your lender immediately (before your first payment is due) and ask for deferment.  Generally, lenders will defer your loans twice, for one year each, if you are unemployed, but your loans, including subsidized ones, will accrue interest throughout the deferment period.  Once you do get a job, start paying back your student loans immediately to avoid unnecessary interest costs.
  • Consolidation: While most student loan providers have suspended consolidation offers in recent years, you can still consolidate your loans through the Department of Education’s Federal Direct Consolidation Loans program.  This program allows you to consolidate several loan types, including Stafford, Perkins, and PLUS, regardless of whether the loans are from the same lender or not.  You can choose to consolidate all of your loans or only some of them, and the interest rate of the consolidated loan will be the weighted average of the interest rates of the loans in the consolidation (The Federal Direct program’s website includes an online calculator that estimates your monthly payment and interest rate if you consolidate your loans).

Consolidation is a particularly attractive option this year if you have any variable interest loans (in general, Stafford loans disbursed between 1998 and 2006).  The interest rate on these loans changes every year and is based on the 91-day May Treasury-bill rate (2.30% + T-bill rate), which was at a historic low this year, 0.18%.  So if you consolidate all of your variable interest loans this year, you can lock in a rate of 2.48%.  Alternatively, you can consolidate these currently low-interest loans with other student loans you may have.

  • Repayment Plan: By default, lenders set your payment schedule to a “standard repayment plan” with a fixed amount due every month for 10 years, but you can change that at any time.  Two options that have existed for a while are the “graduated” and the “extended” repayment plans.  Under the former, your minimum payment amounts start low and increase every two years for 10-30 years until you pay off your loan.  The latter option, on the other hand, allows you to make your repayment period longer than what you were initially granted, up to 25 years, and can be used in combination with either the standard or the graduated repayment plan.  This extended plan is only available if you have $30,000 or more in student loans.

Now, the new plan people are talking about is the “Income Contingent Repayment (ICR) plan.”  Under this plan, your monthly payment amounts are based on your income and family size, and are generally erased after 25 years of repayment, even if you have not paid off your loan entirely.

Changing your repayment plan may mean you would spend more in interest payments.  However, if you cannot afford the monthly payment on a 10-year plan, having lower payments in your first few years or throughout an extended loan period could offer some relief.  Similarly, having a payment plan that is tailored to your income and family size should make repayment more manageable.  And in either case, paying more in interest in the long run is always a better option than being stretched out and risking having to skip on your monthly payments and incurring fees.

Your grace period is almost over, and if there’s one thing you should remember from your education when dealing with your loans, it is that the more prepared you are, the better your will do, and that procrastination, while tempting, is usually not a good thing.  Study your repayment options, assess how much you can afford in monthly payments, and be prepared when your grace period runs out.