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Subject:  Great Rewards for Whom? Date:  6/25/2001  7:47 PM
Author:  W505a Number:  347 of 4855

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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