Is now the time to consolidate my student loans? - FMVperformance.com : The site for all your Ford Mazda and Volvo needs
 
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post #1 of 5 (permalink) Old 08-24-2009, 09:07 PM Thread Starter
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Is now the time to consolidate my student loans?

I have about $20,000 in federal student loans and I'm 1 year into my standard 10 year payoff plan. I currently pay about $233 a month on these loans. $10,363 of it is at a variable rate of 2.2% and $9,856 are at a fixed rate of 6.5%. The variable rate loans have dropped about 4% the past 2 years do to the economy tanking and federal interest rates dropping to almost nothing. I can't imagine interest rates dropping much more in the future as they are at rock bottom now and some of the lowest rates ever.

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Borrowers who consolidate these loans after July 1 will lock in a rate of 2.5% for the life of the loan. Borrowers who are in their grace period, the six-month interval between graduation and the start of repayments, can lock in a rate of 2%. PLUS loan borrowers who consolidate can lock in a rate of 3.38%.

Rates on student loans issued before July 2006 are based on the rate for Treasury bills at the last auction in May. This year, the T-bill rate was 0.18% "as close to zero as you can get," says Mark Kantrowitz, publisher of FinAid.org, a financial aid website. Since it's unlikely rates will go lower they've already risen since the May auction locking in current rates is a smart move.
I could consolidate these loans through the federal government program for 20 years at a fixed rate of 4.125% thus dropping my payment from $233.77 a month to $123.86. I'm pretty much trying to figure out if there is any reason NOT to consolidate these loans. I'm not making a ton of money yet so an extra ~$100 a month would really help out right now. I figure this would give me some more flexibility now and if at some time in the future I have extra money I could just pay it off. However, the interest rate I could lock in is so low I don't even know if it would be worth it to pay it off early. With the interest being tax deductible on student loans a 4% loan is really more like a 3% loan. I figure interest rates will go back up in the next 3-10 years so a savings account would earn more than that. Also, if I don't consolidate now I run the risk of the variable part of my loans going up a lot before the 10 years is up. I think they can go as high as 6.8% before they are capped. I might end up paying as much in interest if this happens if I would have just went ahead and locked them in at ~4%

Quote:
Interest Rate - Consolidation Loan 4.125%

Total Loan Balances
Total Consolidation Loan Amount $20,219.00
Total Education Indebtedness $20,219.00

Totals
Months in Repayment 240
Monthly Payment $123.86
Total Interest Payments $9,507.16
Total Loan Payments $29,726.16
I also have $8,000 of private loans with Sallie Mae at a variable interest rate of 1.75%. From everything I've read you cannot consolidate private loans however so I will just have to ride this one out.

Any financial gurus out there that been through this process before or have any suggestions as to what to do? My family doesn't really know much about this stuff to help.

http://www.filife.com/stories/intere...on-july-1-2009

http://www.usatoday.com/money/perfi/...stafford_N.htm

https://loanconsolidation.ed.gov/App...e/appindex.jsp
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post #2 of 5 (permalink) Old 08-25-2009, 03:42 PM
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Re: Is now the time to consolidate my student loans?

Don't know about consolidation of private loans, but for the federal ones I deffinitely would. As for paying off early, sure you can write off the interest, but its not much to write off. Unless you are making a lot of money, writing off a 4% loan is like making it a 3.5% loan or so. Your probably in the 15% tax bracket (or even less).

Sure its not much, but if you paid it off in half the time, say, that would save you about $4,000 in interest payments over the life of the loan. Call it $3,500 or so once you take in to account the write offs.
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post #3 of 5 (permalink) Old 08-25-2009, 05:36 PM
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Re: Is now the time to consolidate my student loans?

consolidating federal stafford loans will make you ineligible for a number of perks down the line. for exmple, once you've made a certain number of consecutive payments on time, the rate drops considerably.
my minimum pymts were around $220/mo. when i first started paying them off. 4 years later, my minimum pymt is now 160/mo.

also, make sure that any extra payment goes towards principle, no matter what you decide to do.

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post #4 of 5 (permalink) Old 08-25-2009, 10:05 PM Thread Starter
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Re: Is now the time to consolidate my student loans?

[quote author=DamnLocust link=topic=154269.msg3296226#msg3296226 date=1251236208]
consolidating federal stafford loans will make you ineligible for a number of perks down the line. for exmple, once you've made a certain number of consecutive payments on time, the rate drops considerably.
my minimum pymts were around $220/mo. when i first started paying them off. 4 years later, my minimum pymt is now 160/mo.

also, make sure that any extra payment goes towards principle, no matter what you decide to do.
[/quote]

Ummm... I have made 12 consecutive payments on time and my rate dropped like .25%, which is basically nothing. I don't know how you got a deal that has dropped your payment $60 a month. You sure you just don't have variable loans and now since the interest was lowered your payments were lowered as well?
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post #5 of 5 (permalink) Old 09-04-2009, 05:09 PM
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Re: Is now the time to consolidate my student loans?

My two cents on this issue is lock it in before the variable rate changes again, which will be on July 1st of next year. You have some time, but if you are caught sleeping the rate on the variable portion is capped at 8.25% and may get their if our economy recovers and fears of inflation arise.

There is a minimal increase in the interest rate on the variable portion of your loan that occurs when you consolidate (The rate of the variable portion of your student loans is rounded up to the nearest .125%, or in your case from 2.2% to 2.25%), so locking it in next spring will save you that interest increase. Your consolidated rate will be unaffected, because it is based on a weighted average of the rates you are currently paying. If you do not lock them in before July1st of 2010, then the variable portion of the loan will reset based on the change in the 91 day T-bill auctioned on June 1st. The rate you pay on the variable portion is the aforementioned auction price of the T-bill with a set addition.

I locked mine in last year when the 3-mo t-bill was around 1.8% meaning that I am paying just shy of 4% on my student loans, and had I waited I could have locked it in at around 3%. With the interest rate on the t-bill at 0.18%, you are not going to see a drop of 1% as you can not take 1% out of 0.18%.

As far as paying my student loan down, I have a car loan and a mortgage that both have interest rates greater than my student loan. As a result I am going to pay these down first as the car loan is not tax deductible, and to claim the interest on my mortgage I have to give up my standard deduction, so the tax savings there is not what people advertise.

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