This post comes from Mike of CreditCardForum.com, which is a forum for the best credit card reviews (or at least that is what he hopes for it to be). Most recently he wrote the Blue Cash American Express review.
Warning: Before you even read this post, I’ve got to warn you – Even if you pay little to no interest, carrying a credit card balance is definitely not for everyone! There are so many ways credit card companies can screw you over it ís not even funny. I’m not writing about this topic to actually advocate it, but rather to demonstrate how ridiculously expensive student loans are right now.
My friend, Chris, who is a few years older than me was laid off from his job last fall. His bachelor’s hasn’t exactly been too helpful in landing him a new job, so he’s decided to go for a law degree.
His options? Well, there are 20 ABA-accredited law schools in California and of those, just about all of them cost about $40k or more per year. And I’m not just talking about the trust fund baby schools like USC and Pepperdine. Even the U.C. law schools run $38,906 to $44,244 (and even more for out-of-state residents). So here is the rough math on how much he will have to pony up over his 3 years of school:
$40k per year tuition = $120,000
$3.5k per year for parking, books, misc. school expenses = $10,500
$7.2k per year for rent and utilities ($1,200 per month split between 2 people) = $21,600
$3.8k per year for health insurance = $11,400 (most schools require this)
$4.5k per year for food = $13,500
$650 per month for car (payment + insurance + gas + maintenance) = $23,400
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Grand Total = $200,400
Now I’m not accounting for inflation and miscellaneous expenses, but that figure is a ballpark range for how much money he has to come up with. You may be asking why I am not factoring in part-time income? Well, some schools like Chapman actually force students to sign an agreement where they agree to work no more than 20 hours per week (which is ridiculous). So depending on where he goes, working may not even be an option and if it is, I can’t imagine he will be able to bring in more than a few thousand a year while he’s juggling full-time law school.
For non-private loans, here is what he has been offered:
Subsidized Stafford Federal Loan – $8,500 per year at 6.58%
Unsubsidized Stafford Federal Loan – $12,000 per year at 6.58%
Unsubsidized GradPlus Federal Loan – Up to cost of attendance less other aid at 8.5%
So with the exception of the $8,500, he’s looking at paying 6.58% to 8.5% starting from day one. Please, someone tell me why the Fed can afford to loan money at essentially 0% to the banks but hard working grad students are socked with up to 8.5% interest?! I think it is outrageously high and so does he. So guess what he’s decided to do? Pay for the first year using credit cards!
The plan to use 0% credit card offers
Ryan wrote a post earlier this year about the crazy idea of balance transferring your student loan debt away. Well I have to agree it is crazy for 99% of people, but for my friend it actually might be worthwhile. Here’s why:
Since Chris is older, he has a great credit history with high credit limits. In addition, his mom has actually agreed to help out and use her credit to do this. She has a Chase Freedom card with a $32,000 limit and a Blue Cash American Express with a $44,000 limit as well as a few others.
- He’s checked and the schools on his short list don’t have caps on credit card limits. So if someone is crazy enough to do it, the school will let you pay for your 40K of tuition on plastic.
- Assuming he avoids the balance transfer fees, he will actually be netting a few hundred dollars in rewards since the cards give 1% to 1.25% cash back.
Chris asked my advice for the best way to pull this off and here’s what I told him:
Step One: Get a card that offers 0% on purchases
American Express regularly runs promos that give 0% on purchases for the first 12 months. If his mom applied for a second AmEx, it’s unlikely she would be given a credit limit anywhere close to what she has on her old Blue Cash card (which she got before the recession) but lets say she opened one of their other cards with the 0% on purchases offer and was given a $10k limit. What she could then do is transfer a good chunk of her available credit from the Blue Cash over to the new card and bam! She suddenly will have a card with a lot of spending power AND the 0% on purchases!
Step Two: Charge the tuition to the new card
This actually may be the hardest part, because it definitely takes some balls to make a $40,000 purchase with plastic! (Though most schools allow payments on a per semester basis, which would split it into 2 payments).
Step Three: Setup automatic bill pay + watch the account like a hawk
Even with the credit card reform, if you make 2 late payments with 6 months that might be grounds for a rate hike. So obviously they will have to do everything possible to avoid this. I recommended setting up automatic payments and also watching it manually, in case something goes wrong with those.
Step Four: Before the 12 months is up, transfer or pay it off
Carrying the balance past the 0% period would be insanity. So he would either need to transfer it within 365 days from the date of account opening or pay it off. This is definitely risky because who knows where the economy will be in a year? 0% offers might not be around! However lucky for Chris, his mom says if all else fails, she will tap her savings to pay it off and then formalize a loan between mother and son to pay it back.
They haven’t decided yet whether this will be a one-time thing or something they try and repeat every year, using credit cards to finance as much of law school as possible. What do you think? Is Chris insane or does this approach actually make sense for his circumstances?
Editor’s Note: While balance transfers allow you to pay down a balance without interest, they still require minimum payments. Most cards have minimums of 3% or 5%. A 3% minimum payment on $40,000 is $1,200!
