Consolidation benefits: Which is better?

[voter01]

Upfront principal reduction or interest rate reduction benefits? Higher interest on a lower balance or lower interest on a higher balance: at the end of 25 years, which is better?

 

I’m trying to figure out if I am better off with a consolidation company with borrower benefits that are geared towards upfront principal reduction or one that provides a hefty interest rate reduction. Snowpuppy mentioned that someone had done a calculation, and upfront principal reduction was better for that person. Could someone show me how to do this, or link to that post? (I searched and came up empty-handed.)

 

I started going about it like this, but I think this may not be the right way:

If I have $42k in student loans to consolidate (25 year term)…

5% principal reduction = $42k*.05 = $2,100 savings, once

2.25% interest rate reduction = $42k*.0225 = $945 savings, annually

(Granted, the $945 savings will decrease over time as you pay the principal down; and for the 5% principal reduction, you are then only financing $39.9k instead of the full $42k; etc, but you get the gist.)

 

So it appears that the interest rate reduction savings are likely to exceed the principal reduction savings within 5 years, making the interest rate reduction route the better of the two. Is that right? Anyone have a calculator that will work through all 25 years of the term?

[snowpuppy]

An amortization schedule from the guarrantor is going to give you the answer. Since consolidation loans are federally regulated regarding interest paid "using the weighted average" I don't know how the lender/guarrantor could offer you such a big break in interest savings.

 

My break from Keybank was an up front principal reduction vs going with Chase who was offering 5% cash back in a check after the first 36 months of ontime payments. The lenders in my case were giving incentives on the principal. The only interest break I get is 1/4% for direct debit.

 

Maybe Fla-tan can chime in if he knows the math better. If I can find the post I was referring to, will post it in this thread.

[voter01]

My understanding is that consolidation loans are federally regulated regarding interest RATES, but they are not federally regulated regarding interest PAID. (Hence the interest rate reduction deals for auto debit, on-time payments, etc.) But am I mistaken about this?

 

UHEAA’s deal is 1.25% interest rate reduction for auto debit, and an additional 1% interest rate reduction after you have paid the equivalent of 48 payments (you can pay them all at once if you want). (http://www.uheaa.org/bbinfo.htm)

 

I thought the resultant 2.25% interest rate reduction for the bulk of the term seemed “too good to be true,” so I did ask how they could afford to offer interest rate reductions that are better than the standard 0.25% for auto debit. The rep said something about state subsidies that offset their costs, plus they are a non-profit (but I know many lenders are). Are there any other questions I should ask?

 

Thanks for taking a look for that post, Snowpuppy, I appreciate your help! Fla-tan? Anyone else want to chime in?