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This is more on the topic from AFool4Love ("AF4L") earlier:

"Great Rewards" is the current(!) Sallie Mae program that gives people a 200 basis point discount on the net interest rate of their loan, as long as the loan's first 48 payments are made on time. Starting with the 49th payment, an extra credit is given on the loan equal to if the borrower was paying 2% (200 basis points) less in interest.

The loan payment is still the same, it's just that Sallie is chipping in an amount of money equal to what the 2% interest rate difference would be. (Say, if your interest would be $60 at 7.2% and $43.33 at 5.2%. Sallie still charges you the $60, but chips in $16.67 (or 60-43.33) to pay down the debt.

You are not allowed to move from a 10-year payment plan under this deal. Sallie wants the note paid off.

AF4L asks if the "Great Rewards" deal is better than a fixed low Direct Loan rate (one that may be higher, actually, in some years than the net "Great Rewards" one.)

It rurns out that, it depends!

I ran a few spreadsheets with different interest rate scenarios for the variable rate loan, using amounts close to what AF4L gave.

It turns out that under some interest rate scenarios, you come out better with Direct, and with others, it pays to stick with Sallie! (It all depends what you think will happen to short term interest rates in the future.)

For the tests, I gave AF4L a flat 5.7% (discounted with the 80 basis point "timely payer" incentive) at Direct. Sallie had the following rates: 2001--6.5%, 2002--4.5%, 2003--5.5%, 2004--6.25%, 2005--6.25%, and 2006--6.25%.

This assumes that the short-term rates will be low over into the next year, but then return up as the economy (or inflation----or both) starts heating up. Also, I made the monthly payment the exact same, so that there is a fair comparison. (Otherwise, if the monthly payment on one is higher, the note is getting done because more money is being thrown at the one loan, not because less interest is charged.)

It turns out, using a balance figure close to AF4L's and the rates above, Direct beats Sallie Mae by about $35 over the period 2001-2006! (The break you get in the first year, starting July 1 at Direct, covers a good deal of what you lose by not getting the 4.25% in 2002, but it's actually in the outlying years, when Sallie's variable rates are higher than Direct's fixed rate, that the savings really shows.)

That scenario counts on short-term rates heading back up, and of course if they stay low the whole first half of the 2000's, Sallie wins. (You would save about $300 in my analysis, if the 91-day T-bill stays as low as it is now for the next five years.)

From what I've learned, Sallie retains the right to end their "Great Rewards" program, but won't breach their deal with people who have already taken them up on it. IMHO, the real "bet" is how long you think the long-term rates will stay low, and just the sense that, well, do you want to do business with Sallie Mae? (Many folks do, but for reasons stated in earlier posts, I tend to shy away from the profit-seeking student loan companies because of their previous shady lobbying efforts against my (and other student borrowers') interests.)

It would be interesting to hear from people who they think "Great Rewards" will reward in the next six years: the borrower or Sallie?





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<<the real "bet" is how long you think the long-term rates will stay low, and just the sense that, well, do you want to do business with Sallie Mae?>>

How this should have read: how long you think the short-term rates will low!

I am getting posting fatigue.
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uh-hem how long you think they will stay low . . .
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W505a -- first of all, I want to thank you for taking the time to explain that and many other things so clearly. I have been silently benefitting from your expertise for a while; please know that for every person who posts to thank you, there are probably dozens (if not hundreds) more quietly taking notes!

Of course I'd like to get in on a low fixed rate -- I was waiting because I had some vague memory that consolidation takes into account the average rate you have at the time, so I thought thing the thing to do might be to get the deduction and THEN consolidate.

FWIW, people on the graduated repayment plan are eligible for Great Rewards, and depending on balance can take 13-15 years rather than the standard 10. Thought you'd appreciate adding that to your store of loan trivia. :)

I think I'll probably end up consolidating for the assurance of a low rate and the simplicity of having all my loans in one place.
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Of course I'd like to get in on a low fixed rate -- I was waiting because I had some vague memory that consolidation takes into account the average rate you have at the time, so I thought thing the thing to do might be to get the deduction and THEN consolidate.
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I have loans with Sallie Mae and am close to making my 48th payment and thus getting a 2.0 interest rate reduction through their Great Rewards program. I had what I thought was a very clever idea: wait until next month when Sallie Mae reduces my interest rate by an additional 2.0 and THEN consolidate with Direct, anticipating that Direct would calculate the interest rate for my consolidation loan based on the weighted average of the interest rates on my Sallie Mae loans (which would then be 2.0 lower than they were before my 48th payment). I had fantasies of locking in a 4% or lower interest rate after July 1!

But I called Sallie Mae and was informed that the Great Rewards 2.0 interest rate reduction was an incentive that applied to the loan only as long as it was in its original form (i.e., a 10 year loan with Sallie Mae). If I consolidated with another lender (or even with Sallie Mae), the interest rates used to calculate the weighted average would be whatever they were BEFORE the 2.0 percent interest rate reduction was applied. Bummer.

I hope that makes sense. I called and asked 3 different reps and they all gave me the same story. So it was a nice idea, but no dice!
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AF4L, it's always nice to be complimented! Thank you so much for your kind words.

I like to share what I know; it gives me the sense that I have helped somebody with a question/problem that I had to find out the answer to "the hard way" in the pre-internet days (through courses at the College of Hard Knocks.)

I also like to challenge myself for what I do know, versus what I think I know and turns out I have to go look up. (And of course, I get it just plain wrong from time to time!)

I have mentioned this before, but a favorite financial company of mine is Charles Schwab. (They don't do student loans, however.) Schwab started out as a discount broker in 1975, ('74 maybe), with the idea that investing should be "demystified", and laypeople should be given the tools and resources to do their own investing. Schwab also wasn't impressed by a lot of the antics played on Wall Street (--particularly, the houses not putting the investor's interests first.)

As a customer, I came to discover that, by people doing it themselves, two things happen: a) they can invest a whole lot cheaper, and more of their return stays with them, and b) they become more confident about the whole exercise, the more knowledge they gain.

Schwab ( www.schwab.com )started out as like a five person firm, and now is this 25,000 person powerhouse with about $800 billion invested with them. They don't sell on commission, and when they give advice, they strive for the highest quality. The trading commissions and account minimums aren't the lowest in cyberspace, but the overall package (service, access, mutual fund availability, etc.) is great. I even get a magazine every month or so, with plenty of stuff on investment education.

It would be great if this board could be along that line, where everyone shares what they know (or asks questions that are gonna get folks involved), and it just turns into this must-use resource for student loan borrowers.

I don't think there's one like this yet on the internet.
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Hi NPrins!

Is it really a 2% reduction, or does the rate stay the same, and an amount equal to a 2% cut off the interest get applied to the loan as an additional payment by Sallie? it sounds like the rate always stays at 8% (or whatever variable rate), and the "Great Reward" is a totally separate transaction. If the two are put together, it's like you got a reduction of 2%.

This seems to me the only way they can get away with saying that you lose the benefit if you move out of their payment plan. In a normal loan, once you have 4%, that's what you have.

(I wonder if people can go lock in Direct Loan's low rate, which is permanent (not a credit applied to the loan) after 12 months' payments are made, and then migrate over to Sallie with a 5.2% loan, and inevitably get a 3.25% loan if they pay within 10 years . . .)
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Ah-ha! That makes a lot of sense -- I sort of suspected that it was too good to be true. :) That settles it in my mind; I'll be among those jamming the Direct Loan phone lines on July 1.
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Hi NPrins!

Is it really a 2% reduction, or does the rate stay the same, and an amount equal to a 2% cut off the interest get applied to the loan as an additional payment by Sallie? it sounds like the rate always stays at 8% (or whatever variable rate), and the "Great Reward" is a totally separate transaction. If the two are put together, it's like you got a reduction of 2%.

This seems to me the only way they can get away with saying that you lose the benefit if you move out of their payment plan. In a normal loan, once you have 4%, that's what you have.

(I wonder if people can go lock in Direct Loan's low rate, which is permanent (not a credit applied to the loan) after 12 months' payments are made, and then migrate over to Sallie with a 5.2% loan, and inevitably get a 3.25% loan if they pay within 10 years . . .)
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Hi! First, I'd like to say that I agree with AF4L's praise of your advice. I am one of those people who has been silently benefitting and taking notes! Thanks!

I agree that once your interest rate is reduced, that is the rate you have. But here is the link to Sallie Mae's site regarding Great Rewards: http://www.salliemae.com/loans/benefits/rewards.html Basically, it says that borrowers “will earn a full two percentage point interest-rate reduction” after making their first 48 payments on time, so it sounds to me like your interest rate goes down 2%. It also says that the monthly payment will stay the same because the savings are applied to the loan balance. Finally, it says that “borrowers who sign up for an extended repayment plan lose eligibility for Great Rewards.” When I spoke with the Sallie Mae rep on the phone, she said that if I consolidated the loan after the 48th payment, the interest rate that would be reported to Direct would be my rate without the 2% Great Rewards deduction.

You raise an interesting point about locking in Direct's low rate and THEN going to Sallie Mae, making your first 48 payments on time, and getting an additional 2% reduction based on Great Rewards. Something tells me that it wouldn't fly with Sallie Mae though (although I can't say why not)!

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