Here's an email I recently received from a reader. I told him I'd pass it along and let Free Money Finance readers give their suggestions:
I was looking into federal student loan consolidation on a $12,828.19 student loan (now at 7.22% - pretty high).
I was offered 7% after consolidation and it goes down to 6% after 36 months of timely payments. In 3 years locking in an interest rate of 6% is appealing (as my current rate probably will never get below 7%). Making it tempting to just ride the loan out for the entire term as I can accrue interest in a savings account and get a tax break on the loan interest each year.
After review, I realized I have a benefit on this loan with my current lender for a $480 rebate in 15months if I stick with the loan and don't consolidate.
You think consolidation is the best route now, ride it out for the length of the current loan, or simply pay it off after my rebate in 15 months taking the higher rate now?
Sidenote: Currently I'm 24 years old, my net worth is -$50K (student loans) and just got a new job grossing $83k.
So, what would you suggest?
Ok, if you had 10 years to pay off the loan, that would make give
current payments $150.40 @ 7.22% interest
consolidated payments $148.95 @ 7% interest
future consolidated payments $144.17 @ 6% interest
If you didn't consolidate but continued for 15 months, you'd pay a total of $2,256.07 and receive a $480 rebate for a total of $1,776.07.
If you consolidated, after 15 months you'd pay a total of $2,234.19.
On the other hand over the whole 10 years, you'd pay a total of $17,568 with the 7.22% loan (inc rebate) and $17,472.21 with the 7% then 6% loan.
I've assumed that the 7.22% loan is fixed interest (and I guess that its not) but it would need to go up an awful lot to compensate for the $480 rebate. If it was me, I'd probably stick it out for 15 months, get the rebate and then look to consolidate if that were possible.
Posted by: plonkee | July 25, 2007 at 02:47 AM
Re: The tax deduction.
IRS P970 gives a worksheet for figuring out your student loan interest tax deduction, since the deduction is limited by income, this is another factor to consider in "riding out your loan"
Doing some quick math for an income of 75k (83k-other deductions), and 1k in interest paid for the year, you would get exactly $0.00 in tax deductions for your student loan interest.
Posted by: cory | July 25, 2007 at 08:50 AM
83K seems like a great salary for a 24 y/o. Can I ask what line of work you are in?
Posted by: retirementbuff | July 28, 2007 at 10:16 AM