AGB
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Post by AGB on Jun 13, 2011 8:11:50 GMT -5
I'm considering privatizing some federal student loans and am trying to figure out the cons to this. Current rates on the loans vary from 5.5-6.8% and the bank offers 3.9%. From what I understand, a privatized loan would still qualify for student loan interest deductions for tax purposes, provided no additional cash is pulled out during the refi process. That leaves the only con of not being able to put the privatized loan into deferment or forbearance, which is a risk I am willing to take.
Am I missing something?
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Deleted
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Post by Deleted on Jun 13, 2011 8:14:14 GMT -5
Does the private loan have a fixed interest rate? Generally they are variable, and not capped...
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AGB
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Post by AGB on Jun 13, 2011 8:22:04 GMT -5
The rate would be fixed, yes.
ETA: Maybe I'm using the wrong term... it would be a regular loan through the bank, but used to pay off the student loans.
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Deleted
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Post by Deleted on Jun 13, 2011 8:29:46 GMT -5
For me it would be a question of how much do you owe and what would you be using to secure the debt? Is the lower interest rate fixed?
Will the new loans be "student loans" or are you tying this debt to your house or another asset? Are there origination fees with the new loans? If so, will you still earn back enough through the interest savings to cover your costs?
What are the terms on the loan? The feds offer extended repayment terms - 15-30 years - that can minimize your monthly obligation if times ever get tight, but they let you pay however much extra however often you like. Some creditors will only accept one payment per month or will penalize you for paying off the loan early. I send money to the feds anytime I find a little extra money in my budget.
Depending on your field and how much you owe, there are forgiveness programs where any outstanding federal debt is forgiven after 10 years. I'd make sure you aren't eligible for one of those before you eliminate the possibility.
The last potential downside that I could think of is the interest rate deduction you get for (1) paying electronically and (2) making a year of payments on time. When you do your calculations to see if the lower interest rate is enough to save you money after the origination fees, make sure you consider the actual rate you end up paying the feds and not the original terms of the loan.
That's all I can think of. Good luck!
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AGB
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Post by AGB on Jun 13, 2011 8:57:37 GMT -5
Thanks for your input, Sarah... the total owed is just under $20k, terms would be 10yrs (plan to pay in 5 though), not a "student loan", just an unsecured private loan. I don't have an answer as to the origination fee, but it's on my list when I talk to the bank later today... didn't want them to run my credit or waste their time if I'm missing an obvious "duh!". I'll check into the interest rate deductions, forgot about those.
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jd2005
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Post by jd2005 on Jun 13, 2011 9:04:13 GMT -5
One thing to consider is repayment time (My fed SL are set at 30 year repayment, whereas my private SL are at 15 years.)
I would also be a bit weary of the validity of deducting the interest from the private loan if it is not a "student loan." It sounds from your comments that the loan would be a private loan simply to pay off SL. If you've done your research there, and it is deductible, then excellent.
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alabamagal
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Post by alabamagal on Jun 13, 2011 9:17:32 GMT -5
It sounds like you are getting a "personal loan" to pay off your student loans. There are some big differences in the loans.
In order to get the student loan deduction, it must be from a qualified student loan. I believe you would lose this if you took out a personal loan to pay off the student loans. However the deduction is only in the interest that you pay, and it is phased out pretty quickly at middle income levels. Here are some rough calculations though:
For a 20k loan at ~6% interest, you are paying ~$1200 in interest. The deduction amount would be based on your income level, so if 25% you would deduct ~$300 in interest. Phase out begins around 60k income for single filers though.
If you took out a loan at 3.9% for 20k, you would pay roughly $780 in interest per year, but if it is not deductible, you are still ahead of the $1200 - $300 above.
The other main difference is in how you pay back the loan if you get into trouble. For student loans, the lenders can set you up on an income based payment plan, and probably work better with you if you are unemployed, making lower pay, etc. Student loans can not be discharged in bankruptcy, so it is yours forever. A personal loan with a bank may have less leeway in repayment, but it is dischargeable in bankruptcy. However, if you were going through bankruptcy with a private loan that you used to pay off a loan, you may be in some trouble with this because I hear of people trying to do this to get rid of student loans.
For the amount of money you are talking about I would be very cautious. If your plan is to do it quicker, you can accomplish just about as much by paying extra on existing loans.
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AGB
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Post by AGB on Jun 13, 2011 9:25:40 GMT -5
Rereading about deducting interest from private loans... the text does refer to them as "private education loans", which may be an entirely different beast than a personal loan, will have to check more into that.
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DVM gone riding
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Post by DVM gone riding on Jun 13, 2011 9:39:13 GMT -5
for that big a drop in int I would do it. I have about 80k in SL and have considered changing some over to private personal loans, but only if I could save a lot, right now mine are about 5% one is locked in for 30 yrs though so while I want it gone sooner just so it is I don't want to HAVE to pay it off sooner, its like having a car loan for the rest of my working career that just sucks.
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phil5185
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Post by phil5185 on Jun 13, 2011 10:12:12 GMT -5
You probably lose the deduction, but a 3.9% net is still better than a 6% loan with a deduction. I would verify the rate - is the 3.9% a fixed rate for the life of the loan? Or is it a variable rate loan that is tied to a variable rate, eg, LIBOR? As for accelerating it and paying it off in less than 10 yrs - you never prepay 3.9% money, you retain the use of it for as long as you can and put it to work for you.
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