Your mom might be right: if something sounds too good to be true, it probably is.
Such is often the case with student loan incentives, or discounts—the offers of interest rate reductions that most lenders advertise to get you to do business with them.
Surely you’ve seen offers like “Get a 2% interest rate reduction (after 48 months of consecutive on-time payments).” Skimming two percent off your hefty loan balance sounds pretty sweet; that would save you a lot of money. So what if you have to wait 48 months. That’s only, what, four years. Hey, wait a minute…
What if your repayment term is 10 years? That means you’re nearly halfway done paying off your debt when you finally start saving money with this discount. And that begs the question: is it really worth 2% if you have to wait that long?
No, says industry expert Mark Kantrowitz, who describes the bleak reality of student loan incentives on his award-winning public web site, FinAid.org. He writes, “A 2% interest rate reduction after 48 months may sound like a lot, but it’s really the equivalent of a 0.63% interest rate reduction from the start of repayment.” Essentially, that sweet loan discount is itself discounted thanks to the waiting period.
Is this what they mean by “fuzzy math?”
“A prompt payment discount that requires 48 months of on-time payments for a reduced interest rate is effectively reducing the value of the discount by about 69%,” Kantrowitz concludes. “This is partly because the discount is in effect for a reduced time period and partly because the interest portion of the monthly loan payment is lower the further you are into repayment due to a smaller remaining loan balance.”
While this isn’t the most encouraging revelation, keep in mind that not all lenders are alike, and not all incentive programs impose so many restrictions. You just have to do your homework. (Here’s one place to start: FinAid.org’s list of major lenders and their Stafford loan incentives.)
Portions Copyright © 2006 by FinAid Page LLC (www.finaid.org). All rights reserved. Reprinted with permission.
Once I consolidated with T.H.E., I started to get letters in the mail about being prequalified for offers that sounded "too good to be true". However, by calling 1-888-5-OPT-OUT, I removed my name from the list and will (hopefully) recieve fewer tempting, albeit misleading, offers.
(I already checked the Better Business Bureau website (www.bbb.com), to make sure that it was a legitimate company and not a phishing scam trying to steal my identity. While it is a real company, based on BBB files, "this company has an unsatisfactory record with the Bureau due to its failure to substantiate or modify advertising claim(s)". But it's not a bad idea to check these sorts of things out for yourself, if you're not sure. Just input the name or website of any company you're considering doing business with and see what the Better Business Bureau has on file about that company, good or bad. The company in this case was Goal Financial, LLC, Student Loan Consolidation Center, www.goalfinancial.net)
That is very interesting. I probably would have thought it was a great deal too, without doing the calculations. Good Info!