09 Sep 4 Strategies You Should Never Employ to Pay Off Student Loans
When making payments does not lower balances quickly, you might look for alternatives to improve your finances. While there are multiple options to transfer student loan balances to another form of debt; most will leave you in worse financial conditions.
Here are 4 ways of eliminating student loan debt you should avoid.
- Borrowing against your home: There are many benefits of home ownership, including the ability to use the equity for other purposes. You can obtain a cash-out refinance and put the excess towards student loan balances. In some cases, you can get a second mortgage or a home equity loan or line of credit for debt reduction.
- Home loans are a bad idea because it converts unsecured debt to secured debt and you could lose your home if you miss payments. In most cases, home equity loans will not lower the interest because student loans come with low-interest rates. Income-based repayment plans can extend federal loans to 20 or 25 years, about the same repayment schedule as a home loan, further limiting the value of transferring student loan debt to your home.
- Use retirement funds or a 401K loan: Building retirement balances through a work retirement account one of the fastest and best ways to prepare for retirement. Many companies also allow employees to borrow against the account balance. However, using your 401K to pay off student loans will short your retirement fund.
- Another major limitation is the maximum five-year repayment on 401K loans, requiring you to repay the loan faster than the traditional student loan repayment plan. Failing to repay the debt, could also result in taxes and penalties on any remaining balance, further diluting the benefits.
- Tap into your life insurance: Permanent life insurance policies accumulate cash value, which you can borrow against at a time of need. However, using this money to pay off student loan debt, could leave you with a lower death benefit or a canceled policy.
- Credit card transfer: Capitalizing on 0% balance transfer options can seem like a good idea because you eliminate the interest charges for a short time, allowing you to reduce student loan balances faster. The challenge with this strategy is that if you do not pay off the entire balance, the student loan debt becomes a high-interest credit card debt.
Transferring student loans to another form of debt is almost always a bad idea because you lose the benefits only available on college debt. Federal student loans come with low rates, generous deferment options, and loan forgiveness programs.
Federal student loans also allow you to enroll in an income-based repayment plan, which makes the payment affordable and can prevent default if you earn less than you hoped after leaving school. While private student loans do not have all the benefits of federal loans, they may have some attractive features, such as the ability to negotiate the settlement of your student loan debt, that make it unwise to transfer the loan to another form of debt.
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