Private Student Loan Consolidation
Private
student loan consolidation can be both confusing and difficult.
Most private student loans are tied to an prime rate or other
index. What this means is that the interest rate charged is
whatever that index rate is plus the rate charged by the lender.
As an example, SallieMae, one of the largest private student loan
lenders, uses the London Interbank Offer Rate as it's index.
Since
the financial downswing started in the fall of 2008, all interest
rates that make up index rates have dropped dramatically. What
this means to most borrowers is that their current interest rates
are as low as they have been in years. If you had a private
student loan that was based on an index of lets say 6% from early
in 2008, it is now based on an interest rate of 1% or lower.
As an
example, your interest rate started out as the index rate of 6%,
plus the interest rate of 4.5% charged by the lender. This gave a
total interest rate of 10.5% on your private student loan. Since
the index rate has fallen to 1%, you now have an interest rate of
5.5%. So regardless of the lender rate, you have benefited from
the financial downturn.
So the first thing you need to
determine is your current lender interest rate and the index rate
that is used to determine the total interest rate on your private
student loan. These two numbers will give you the true current
interest rate of your loan. Most private student loans have a
lender rate from a low of 4.5% to a high of 13.5%.
The current best interest rate for
a home equity loan (used as base for someone who has a good credit
score) is 8.4%. So depending on your credit score, and other
aspects used to determine your credit worthiness, that is the best
possible interest rate. This interest rate will change from day to
day but you can usually find the exact number by checking
bankate.com or other financial information website.
Once you have determined your
current interest rate, you need to compare it to the best possible
interest rate (as of March 2009 that is 8.4%) of home equity loan
to see if you will save any money. In our first example of a
lender interest rate of 4.5% and index rate of 1% would give a
total interest rate of 5.5%. There would be no financial benefit
to any private student loan consolidation in this example. But
private student loan lender rates can vary between the low of 4.5%
all the way up to 13.5%.
An unsecured loan will usually be
several points above a home equity loan. Depending on your credit
score, usually at least 3 points above the home equity loan rate.
So you could use 11.5% (3 points above the current 8.5% home
equity loan rate) as a possible interest rate for comparison. If
your current total interest rate is above the 11.5% rate, you may
benefit from a private student consolidation loan.
There are other factors to consider
when looking at private student consolidation loans. Having one payment,
one lender to deal with, and one payment date is a big convenience
factor. There's also the interest rate index to consider. Right
now the rate is very low so it's a positive factor. But if the
financial markets should turn around, or if inflation becomes an
issue, the rates could go up quickly. Any private student loan consolidations to
achieve a set interest rate, not tied to any market conditions,
can be a long term advantage.
There are a couple items to be
careful on any loan consolidation. Be care to look at any added
fees or penalties. Origination fees, refinance fees, charges for
extra services, and etc can greatly increase the cost. A common
method is to roll this additional cost into the actual loan so
it's not as obvious to the borrow. Early pay off fees, late fees,
and other additions should be carefully reviewed on any private
student loans consolidation efforts.
So is a private student loan
consolidation a good idea? It entirely depends on your current
interest rate, other factors you consider important, and what the
market has to offer. Do your homework and review your current
interest rate, payment terms, and other aspects of your individual
private student loans. Do a comparison of not only the interest
rate but any other fees that might be involved. Examine and review
any private student loans consolidation offer to make sure you understand all aspects.
