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Before consolidating look at all the companies that are out there before you do it. I was stupid and listened to an advisor towards the end of getting my Doctorate degree. She only said to consolidate now and do it this way. Later, i find other companies with much better rates. So my nice LARGE student loan from the government is now earning them even more interest.
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Greetings, bullockm13, do you have any examples of the offers from the other companies you refer to with much better rates? My understanding is that Federally-backed student loans must conform to the same set of rules in terms of rates offered and rate changes. I am not sure of whether terms for deferment, forbearance, repayment and interest rebates also must conform - possibly not, as Sallie Mae does not have the same array of repayment plans that Direct Loans does. It would be interesting to see what the terms are of the offers you mention. It would also be interesting to see whether the policies differ regarding how payments are applied, allowed method of payments and what kind of customer service is provided.

xraymd
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Hi

I don't post much, but I have recently spoken to Nelnet about consolidation. I have not looked anywhere else yet. I was told that what would differ between business is the type of incentives offered. I was offered a choice of the two options below:

1% interest rate reduction after I make 36 consecutive on-time monthly payments

or

3.33% principal reduction after I make 30 consecutive on-time monthly payments

I'm not sure I will consolidate with Nelnet, but if I do, does anyone have any idea which incentive makes more sense?

Lost
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1% interest rate reduction after I make 36 consecutive on-time monthly payments

or

3.33% principal reduction after I make 30 consecutive on-time monthly payments


I may be math-impaired, but I'd say the 3.33% principal reduction. First off, it comes 6 months before the other offer. Secondly, the less princiapl you have, the less interest will accrue.

Maybe some math guru could lay out that bit. :)

jmc

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Answer is: it depends.

If you plan to pay the loan off relatively fast, then you want the 3.33% principal reduction in Month 30,

BUT

if you plan to pay the loan off over a long period of time, then the lower interest rate is always better!

I used $50,000 and a 4.5% interest rate, over 360 months, and found that the reduced interest rate finishes the loan in about 308 months, while the principal reduction gets you to 'done' at 340 months.

Run a spreadsheet for yourself, and you will see that the advantage of getting principal reduction is eaten up in just a handful of years, compared to paying a lower interest rate. You have to keep the monthly payment constant, of course, or it will confuse the analysis.

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Another thing you might consider is the deductibility of interest on student loans from your federal income tax. I believe you can deduct up to 2,500 a year from your fereal income tax for interest paid on student loans. So if you're going to be deducting the interest anyway, I believe that the lower rate may not really helpful while the principal reduction will lower your payments. Be careful with this deduction however, I believe the phase-out for taking it is an AGI around 50,000.\

Scott
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