My Student Loan Decision
In a recent post, which you can view by clicking here, I broke down a recent offer my student loan lender, Iowa Student Loans (ISL) has presented. Because of the recent turmoil in our credit markets, the Federal Reserve has been cutting the Federal Funds rate, which for many has been a good thing. These cuts have meant better rates on mortgages, credit cards, and auto loans. However, it’s possible that your loans are actually moving in the opposite directions as the rate cuts – which is the case with my student loans.
My current private student loan rates are based off a benchmark called the Cost of Funds Index (COFI). This particular index has soared in the past couple of months, which has pushed my student loan rates from around 8% three months ago to about 13% as of April 1. Because of this drastic raise in rates, ISL has actually offered all of it’s borrowers a chance to amend our original contracts to follow a different index, the 3 Month London Interbank Offered Rate (LIBOR). Currently the LIBOR rate is about 2.68% - ISL adds an additional 2.70% to the LIBOR rate to calculate the rate they will offer. Thus, my current rate, if I change to the LIBOR index would be 5.38%.
You can read more about how your student loans rates are set here.
As I mentioned in an earlier post, the decision seems so obvious, which is exactly why I’m a little hesitant to amend my original loan. However, after doing some research, I have determined changing to the 3 Month LIBOR index is by far, the correct thing to do. As you can tell from the 3 Month LIBOR history chart below, this particular index reached a high of 6.684% since 1998 – even at the highest point in the last 10 years, my rates would be 9.384% (with the 2.70% added). Although this rate is still high, it’s nearly identical to the rates I have been facing anyways during the past couple of months.
I was originally hesitant to sign; because my thought process was that the rates are about as high as they will ever be (barring any more rate cuts) which in the long run my rates would slowly go back down. Although this is probably the case, the huge drop I see right now by far outweighs this long term approach, because even if the 3 Month LIBOR reaches it’s high of 10 years ago, my rate would still be reasonable and I would have had the benefit of paying off more principal during the low rate months while I have a larger balance.
I will continue to pay the current amount I budget away for my loans regardless of the dramatic reduction I will have due each month, this will allow me to take full advantage of this kind offer from ISL (I didn’t realize until researching, that ISL is a non-profit). I feel as though I have caught a major break with this offer and I plan to take full advantage, it looks as though this change will allow me to cut years off my repayment. Thanks ISL! $
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Comments
Student loan consolidation rebate rebates are usually given by a private company when student loans are consolidated equaling more than $20,000. The more student loans consolidation, the higher the student loan consolidation rebate. This is usually a percentage of the principal loan balance that is either applied to the outstanding loan or sent to the borrower as a cash payment. This can be a very attractive offer, especially when in the form of a cash payment to the borrower.
Good! I’m glad we’ve come to the same conclusion. I also didn’t realize ISL is non-profit..
I’ve been researching LIBOR since Sunday, but I had very limited info read over the phone by my mom (mail still gets sent to her house). I’d been awaiting a copy of the actual offer since I wasn’t sure which LIBOR rate ISL had chosen (3-month, 6-month, etc.). But after studying the historical rates, I realized that any of the LIBOR rates would be better than the ~4% increase in the past three months.
I’m excited to continue making my current payment (which is over the minimum anyhow)! I have 5 years of out-of-state tuition, and I’m eager to chip away at that principal whenever it’s feasible.
Thanks for your posts!!