Lower Interest Rates - A Boon To Students

Many people who have already been through the student loan mess will know what this means, but for the new students and those who will get ‘first crack’ at this advantage, I’d like to take a few moments to describe what this latest change does.

Money Matters

For the average student who owes 20,000 at 6% interest, this change bumping the rate down to 3.4%, this will save about 500 dollars per year in interest. Its not huge, but considering that the yearly college bill for private universities is generally in the 30-40K range now, it is not hard to imagine that saving a few thousand dollars a year in interest is a bit of welcome news.

Does It Make a Difference

The unfortunate fact though, is that far better than reducing the interest paid out, would be the idea of giving grants to the students in the first place. this would reduce the overall debt load that students had to contend with when they are starting out in school. Low interest rates just encourage the debt to linger.

What They Aren’t Telling You

Unfortunately, there is a market impact of this change. There are definite potential downsides for both the businesses themselves and their shareholders as well as the actual consumers/borrowers for these loans.

As a result of this change, the lenders will make less money on the loans that are put out for college. Some lenders might go out of business; some might give less benefits to employees, which if they are not paid much could increase the strain on the social system for benefits like healthcare, welfare, and unemployment. And worst of all, is that you will probably get worse and worse customer service on these loans, which at the end of the day could put you at greater risk for identity theft. Remember, these people have access to all of your personal information. If they are not compensated fairly or have bad employers, an unhappy employee could lift personal data.

When To Consolidate

The question still remains though: when should I consolidate my loans? The simplest answer that many people get is “as soon as possible”. Even though this will likely save you some money, it might actually be locking you into a higher rate than you could get otherwise. My experience was that I was stuck at a high rate in my consolidated loans and then the interest rate went down.

So….Bet On The Market?

The problem with waiting though, is that this is just like market-timing in stocks; it can go the opposite of what you would like and really screw you. And adjustable rates are definitely a bad business. So stick with a low fixed rate as soon as you can.

Pay off the debt with extra principal each month. And be sure to avoid large balloon or graduated payments. These are generally causing you to pay less than you should each month or stretch out the loan longer than you should

The effect of interest payments that you’ve avoided can be amazing in your late 20s and early 30s and you will be glad you got into that habit. I personally paid the minimum on my loans and successfully wasted about 5000 dollars in interest payments. Avoid this if you can; you will be much happier in the long run.

Source:
http://www.usatoday.com/money/perfi/college/2007-01-17-house-student-loans_x.htm