November 17, 2006
There are lots of consolidation companies out there, promising all sorts of borrower benefits. Some are really great deals. Some sound great… but really aren’t so hot once you do the math. Here’s an article I linked to earlier this week from StudentLoanConsolidator.com, but that I think you all should read. It’s a great explanation of what I’m talking about:
I should point out that this article uses last year’s interest rates. This year’s rates are:
- In school/in grace: 6.543%
- In repayment: 7.143%
- New Stafford Loans (disbursed after July 1, 2006) will be fixed at 6.8%
“Comparing Student Loan Consolidation Benefits
- What’s the best benefits plan?
There are a lot of companies advertising a lot of different discounts and borrower benefits. How do you tell which is the right plan for you? Let’s look at some popular plans.
- A: 0.25% off for auto-debit
- B: 0.25% off for auto-debit, 1% after 36 months (ours), $20k balance for full savings
- C: 0.25% off for auto-debit, 1% after 24 months, $50k balance for full savings
- D: 2% instant cash back
- E: 3% instant cash back
- F: No benefits
So, how much will you actually save? Let’s use our statistical average loan balance of about $35,000 as our reference point, and the current Stafford Loan repayment rate of 5.3%. Statistically, in an average pool of students with loans that need to be consolidated, 19% of them will have balances over $50k, meaning that 81% of students, or 4 out of 5, will not qualify for plan C, which at first appears to be the best deal. 64% of students are likely to have balances over $20k, meaning that 3 out of 5 will get our benefits.
- A: Total interest: $20,204.40. Savings: $1,633
- B: Total interest: $15,761. Savings: $6,076 (the most savings)
- C: Total interest: $20,204.40. Savings: $1,633 (no additional savings because of low balance)
- D: Total interest: $21,837. Savings: $700
- E: Total interest: $21,837. Savings: $1,050
- F: Total interest: $21,837. Savings: $0“