Student Loan Consolidation ComparisonWhen interest rates are trending upward, it is an excellent time to get a student consolidation loan: it is possible to lock in today’s low rates by consolidation. Here is an overview of how student loan interest rates are set, how consolidation loans works, and a comparison of discounts offered by some student consolidation loan companies.
Student Loan Interest RatesConsolidating student loans are more convenient when interest rates are rising. Student loan interest rates are determined by a statutory formula set by the US government. The actual laws are defined in Title 20 - Education, Chapter 28 - Higher Education Resources and Student Assistance of the United States Code. It is important to refer to it when developing a financial plan.
Regarding student loans, interest rates may be fixed (like the Stafford) or variable (like the Perkins). In general, for variable-rate Federal student loans, the interest rate is set annually at a benchmark rate plus a margin. Similarly, credit card interest rates are typically based on the benchmark U.S. Prime Rate, as published in the Wall Street Journal. Student loan interest rates, are based on something called the 91-day Treasury bills. The margin added to the benchmark rate is called the spread, and depends on when the student loan was originated and the loan’s repayment status.
The 91-day Treasury bills
The 91-day Treasury bill (or T-Bill) is a U.S. government security that is sold weekly via auction by the U.S. Dept. of Treasury’s Bureau of the Public Debt. Treasury bills are sold by the government to raise money for the short-term, namely four, thirteen, or twenty-six weeks. Treasury bills are sold at a discount, and redeemed for their full value when they mature. This means the buyer earns money on his investment. The interest rate earned is called the bond equivalent rate.
T-Bills are a good way to determine a benchmark interest rate for short-term debt because are sold in such high volume. Student loan interest rates are adjusted annually to “the bond equivalent rate of 91-day Treasury bills auctioned at the final auction held prior to such June 1.” (20 USC Sec. 1077a). The Bureau of Public Debt website includes the Historical Treasury Bill Download, that is, the historical T-Bill rates. You have to select a date range, Security Description, Issue Date, and High Equiv Yield. Then open the resulting file, and filter by 13-Week and sort by date.
Student Loan Consolidation Business
Loan consolidation is the process of combining multiple loans from different lenders or sources, resulting in a single loan. Although Consolidation does not raise or lower the amount of the debt owed, it does make other changes. When making multiple payments, then that will be reduced to one. If the current loans are at a variable interest rate, the consolidated loan will be at a fixed interest rate for the life of the loan. It is important to note that with student loans, you can only consolidate once unless you take on additional student loans.
Congress recognized the need for loan consolidation and regulated the whole process (20 USC Sec. 1078-3). These regulations prevent lenders from taking advantage of borrowers. Basically, there are no fees for loan consolidation and the consolidated interest rate is determined by a formula, which simply takes the weighted average of the interest rates on the loans consolidated, rounded to the nearest higher one-eighth of 1 percent, with a maximum of 8.25 percent (20 USC Sec. 1077a).
In fact, lenders make profit on consolidation loans whenever they can borrow money at a rate that is lower than the loan they must give the borrower upon consolidation. If interest rates rise to the point where the borrowed amount costs them a higher interest rate than what they are earning on the loan, the Department of Education makes a special payment to reimburse the lender. On the other hand, when interest rates are declining, their spread widens beyond the reimbursment point, and they keep the extra profit.This is known as Floor Income. This shows it is a highly profitable business, because the lender is guaranteed a certain level of income regardless of the direction of interest rates.
Reasons For Consolidating Student Loans
In summary, if you have variable-rate Federal student loans, it is very convenient to consolidate them when interest rates are low. This way, you have an advantage: you lock in these low interest rates for the remainder of your loan term. The caveat is that you can not reconsolidate again in the future, if interest rates decline again. Moreover, when rates are very low, you can even make money off your student loans. For example, if you consolidate your loans to a rate of 2.5%, and you deposit funds you would have used to pay off those loans instead in a savings account that pays 3.25%, you will be making a profit. And Student loan interest is generally tax-deductible, so you’ll be making an after-tax profit.
As a matter of fact, lenders cannot possibly change the terms of loan consolidation, but they still must differentiate their product in order to attract borrowers. Consequently, lenders usually offer special discounts and services, involving interest rate reductions and online access. It is also possible to consolidate your loans directly through the government, but then you do not get any special discounts. By knowing where to find the best discounts, you can get the advantages of a well-known and regulated product (the student consolidation loan) at the most favorable and profitable terms.
Student Loan Consolidation ComparisonStudent loan consolidation can lower your monthly payments by up to 45% by extending the repayment term of your loan, and locking in a low, fixed interest rate. However, extending your repayment term can also increase the total amount you will pay over the life of your loan.
The chart below shows a table that compares the monthly payments and total amount paid over the life of a Federal Consolidation Loan. This chart is based on the amount you consolidate and the number of years in which you choose to repay your Federal Consolidation Loan.
This chart is for comparison purposes only, and is meant to help you make an educated decision about your Federal Consolidation Loan. Take into account that some student loan companies make special discounts and reduction in interest rate if you choose to pay via auto-debit, if you make a minimum number of consecutive, timely payments, but sometimes there is a minimum number of months you must consecutively make timely payments before the discount takes effect. Some lenders offer a discount if you consolidate in your grace period, and some discounts require a minimum amount of indebtedness to qualify. Anyway, whenever interest rates rise and lenders floor income decrease, there are less loan balance reductions.
2006-2007 Federal Consolidation Loan. Estimated monthly payment and total cost of loan comparison chart. Based on total amount consolidated and repayment period.
Student Loan Interest RatesConsolidating student loans are more convenient when interest rates are rising. Student loan interest rates are determined by a statutory formula set by the US government. The actual laws are defined in Title 20 - Education, Chapter 28 - Higher Education Resources and Student Assistance of the United States Code. It is important to refer to it when developing a financial plan.
Regarding student loans, interest rates may be fixed (like the Stafford) or variable (like the Perkins). In general, for variable-rate Federal student loans, the interest rate is set annually at a benchmark rate plus a margin. Similarly, credit card interest rates are typically based on the benchmark U.S. Prime Rate, as published in the Wall Street Journal. Student loan interest rates, are based on something called the 91-day Treasury bills. The margin added to the benchmark rate is called the spread, and depends on when the student loan was originated and the loan’s repayment status.
The 91-day Treasury bills
The 91-day Treasury bill (or T-Bill) is a U.S. government security that is sold weekly via auction by the U.S. Dept. of Treasury’s Bureau of the Public Debt. Treasury bills are sold by the government to raise money for the short-term, namely four, thirteen, or twenty-six weeks. Treasury bills are sold at a discount, and redeemed for their full value when they mature. This means the buyer earns money on his investment. The interest rate earned is called the bond equivalent rate.
T-Bills are a good way to determine a benchmark interest rate for short-term debt because are sold in such high volume. Student loan interest rates are adjusted annually to “the bond equivalent rate of 91-day Treasury bills auctioned at the final auction held prior to such June 1.” (20 USC Sec. 1077a). The Bureau of Public Debt website includes the Historical Treasury Bill Download, that is, the historical T-Bill rates. You have to select a date range, Security Description, Issue Date, and High Equiv Yield. Then open the resulting file, and filter by 13-Week and sort by date.
Student Loan Consolidation Business
Loan consolidation is the process of combining multiple loans from different lenders or sources, resulting in a single loan. Although Consolidation does not raise or lower the amount of the debt owed, it does make other changes. When making multiple payments, then that will be reduced to one. If the current loans are at a variable interest rate, the consolidated loan will be at a fixed interest rate for the life of the loan. It is important to note that with student loans, you can only consolidate once unless you take on additional student loans.
Congress recognized the need for loan consolidation and regulated the whole process (20 USC Sec. 1078-3). These regulations prevent lenders from taking advantage of borrowers. Basically, there are no fees for loan consolidation and the consolidated interest rate is determined by a formula, which simply takes the weighted average of the interest rates on the loans consolidated, rounded to the nearest higher one-eighth of 1 percent, with a maximum of 8.25 percent (20 USC Sec. 1077a).
In fact, lenders make profit on consolidation loans whenever they can borrow money at a rate that is lower than the loan they must give the borrower upon consolidation. If interest rates rise to the point where the borrowed amount costs them a higher interest rate than what they are earning on the loan, the Department of Education makes a special payment to reimburse the lender. On the other hand, when interest rates are declining, their spread widens beyond the reimbursment point, and they keep the extra profit.This is known as Floor Income. This shows it is a highly profitable business, because the lender is guaranteed a certain level of income regardless of the direction of interest rates.
Reasons For Consolidating Student Loans
In summary, if you have variable-rate Federal student loans, it is very convenient to consolidate them when interest rates are low. This way, you have an advantage: you lock in these low interest rates for the remainder of your loan term. The caveat is that you can not reconsolidate again in the future, if interest rates decline again. Moreover, when rates are very low, you can even make money off your student loans. For example, if you consolidate your loans to a rate of 2.5%, and you deposit funds you would have used to pay off those loans instead in a savings account that pays 3.25%, you will be making a profit. And Student loan interest is generally tax-deductible, so you’ll be making an after-tax profit.
As a matter of fact, lenders cannot possibly change the terms of loan consolidation, but they still must differentiate their product in order to attract borrowers. Consequently, lenders usually offer special discounts and services, involving interest rate reductions and online access. It is also possible to consolidate your loans directly through the government, but then you do not get any special discounts. By knowing where to find the best discounts, you can get the advantages of a well-known and regulated product (the student consolidation loan) at the most favorable and profitable terms.
Student Loan Consolidation ComparisonStudent loan consolidation can lower your monthly payments by up to 45% by extending the repayment term of your loan, and locking in a low, fixed interest rate. However, extending your repayment term can also increase the total amount you will pay over the life of your loan.
The chart below shows a table that compares the monthly payments and total amount paid over the life of a Federal Consolidation Loan. This chart is based on the amount you consolidate and the number of years in which you choose to repay your Federal Consolidation Loan.
This chart is for comparison purposes only, and is meant to help you make an educated decision about your Federal Consolidation Loan. Take into account that some student loan companies make special discounts and reduction in interest rate if you choose to pay via auto-debit, if you make a minimum number of consecutive, timely payments, but sometimes there is a minimum number of months you must consecutively make timely payments before the discount takes effect. Some lenders offer a discount if you consolidate in your grace period, and some discounts require a minimum amount of indebtedness to qualify. Anyway, whenever interest rates rise and lenders floor income decrease, there are less loan balance reductions.
2006-2007 Federal Consolidation Loan. Estimated monthly payment and total cost of loan comparison chart. Based on total amount consolidated and repayment period.
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