So I’m now floating about 50k in student loan debt at an interest rate of 1.85% and I’m guessing you may be asking how?   But wait, there’s more….not only am I floating 50k in student loans, these loans are no longer tied to any federal program which means if I were to default I wouldn’t even have my check garnished!

So how you ask?  Well it’s a three step process and this won’t work for you if you aren’t good at saving money.   No, this doesn’t involve credit card arbitrage although that would be a good next step to get the loan rate from 1.85% to zero for 12  to 18 months anyway.   The 1.85% rate however is good for up to 5 years but right now, I’m on a path to pay off in three years.

Step 1 – You will need to have an initial pool of money from somewhere (anywhere it doesn’t really matter as even your local loan shark can be of help).  I would suggest you start with 10k or so.  For me, I took out federal student loans at a rate of 6.7% over the course of three years about 10k per semester for a total of 50k so far.  I still have a couple of more semesters to go so perhaps another 20k.

Step 2 – Take the pool of money (e.g. 10k) and go to a local credit union that offers share secured loans.  Essentially this means the credit union will loan you dollar for dollar what you put into the credit union.  The beauty here is to find a credit union that offers low interest rates, many are below 2% right now.

Step 3 – Pay back the initial loan (from Step 1).   You have now “laundered” your student loan debt from government encumbered debt to cash secured debt with no government hooks into your debt structure.

There are a few cons to this strategy.  First, you will no longer have any student loan forbearance, grace periods, etc as the loan is effectively paid off but this is a small price to pay for not having to worry about the government garnishing your tax refunds, social security, etc at some point later in life should you default.

The second con is that you will need an income source to start paying back the loan as it’s only a three to five year loan.   Depending on your loan amount the payments may be as low as $100 to $1200.

The good news is that after paying the first few payments, your cash in the secured loan becomes free so let’s say you owe $10,000 and you make a $100 payment which means you now owe $9,900.  You should now have $100 in cash “freed” from the encumbered-ment of the loan and the loan can be paid back in a self-sustaining manner from the pool of money that becomes free payment after payment.