Also there’s a misconception that people have: 6.8% is the rate for NEW LOANS this year (loans being disbursed). And it’s a fixed rate. Every body else has a variable rate and most are different.

Usually rates I encounter on a daily basis average around 5% (some got higher rates in the 90s and others got lower rates a few years ago).

I agree with Mike–if somebody has the CASH to pay off their student loans, they’d be MUCH better off making a low-risk investment. With something creative like tax liens, people can easily make over 10% with virtually no risk. Not bad!

Also, look at how consolidating could help in a unique way: the average person with about $40,000 in student loans at around 5% will pay about $430 a month. After consolidating, they will pay about $230 a month. Yes, the loan term is extended, but there are no prepayment penalties. Anyhow, that extra $200 a month can not only pay for extra bills, clothes, cars, etc (what most people do with their savings) but it can ALSO be used to fund a retirement plan. That extra $200 could go to fund an employer contribution-matched 401(k) and make 8% and by the time you retired 30 years later you would have over $550,000 for retirement. not bad eh?
With a 1.25% incentive off your rate, in that time you wouldh have paid about $19,000 in interest VS the $10,000 you would have paid without consolidating.
So paying off your loan faster may have saved you some interest, but the MAGICAL QUESTION IS: could the money you’re using to pay off your debt be more helpful to you in some other way? When facing paying off credit cards, the answer is often “no”… but when looking at paying off student loans, the best bet is USUALLY to use that money elsewhere.

What do you think?

I work at University Loan Services and help people
consolidate their student loans. My name is Jason. You can visit universityloanservices.com

Feel free to call and ask me any questions.

Of course, I hate debt just as much as the next guy, so I even have to force myself to do the “logical” thing sometimes.

Another grad student in that department took out the maximum possible student loans each year, bought a defunct ski lodge in Vermont, insured it, and it mysteriouslky burned down. He made quite a profit on his student loans. Should have been going for an MBA, maybe?

– Jonathan Vos Post
http://magicdragon.com

Nevertheless, let’s use the 6.8% rate and a handful of reductions mentioned before; a ~5.5% rate (or perhaps 3-4% in a year to come). You are far better off not making additional payments to your student loan. Use the extra money to start a Roth IRA account and invest in a Total Stock Market Fund. Risk, yes. Risky, no.

The fundamentals remain that over the life of a 15 year student loan, as the market is predicted to average 9%, paying off your loans early is poor advice.

Unless, of course, you are locked in at 8%+ and have absolutely no way of getting out of it.

Fed rates change; fundamentals do not. Be wary pop-culture finance.

1) If you refinance your student loans and it increases the total amount for repayment by ONE RED CENT, you can no longer claim the interest as a tax deduction. Even if you refinance at a lower interest rate, with combining the loans, it will be increased. So, combine your loans in a refinancing situation and lose your tax deduction.

2) Regarding your loans being erased in the event of your demise: ONLY if no one else’s name is on the loan. That means that if you took the loan out with your parents, they will then be responsible. If you refinanced your loans and put your spouse’s name on the new loan as well, your spouse will be responsible. NEVER, EVER add anyone else to your student loan if it can be avoided.

I actually consolidated at 5.25%, but I got a .5% reduction after 48 months of on-time payments and another .5% for letting the lender draft my checking account each month.

I do have one private loan that I could not consolidate. It’s got a variable rate that currently is 8.07%. Fortunately, it’s a fairly small loan.

Also, the tax deduction for interest phases out as your income increases. So, you can’t count on it.

I seriously doubt you have done real searching on refinancing student loans. Federal rates are currently fixed at 6.8% and the only thing that refinancing will get you are lender incentives for 24-36 on-time payments (to the tune of a rate reduction of .5-1.5%) and possibly for automatic payments (reduction of .25%). You are still talking around 5% at best, and that is only after at least 2 years of repayment. If you have private loans you are even worse off and would be extremely lucky to find 7% even with perfect credit. At this point, 2% refinancing is pie in the sky. 3 or 4 years ago the federal loans were a different story, and I am glad to say I locked in 2.85% on mine (which I am in no rush to pay off), but that time is long gone. It looks like Democrats have gotten the rates for new loans down to 3.4% next year, but that doesn’t help those with current loans.