Wednesday, October 26, 2011

Obama's Student Loan Plan: The Numbers

Obama recently touted his new student loan consolidation plan.  This is an issue which hits very close to home since I will have a lot of student loan debt when I graduate.

The gist is if you consolidate your government loans, then you save 0.5% on the consolidated rate.

Great!  But consolidating your loans means that you lose one very important thing: the ability to pay off the highest interest loans first.

So let's see how the numbers pan out.  We will assume that a person has 4 $12,000 loans (total of $48,000), with interest rates ranging from 5% to 8% will put $1,000 per month into the loans.

So I compared paying off the highest interest loans first, to Obama's consolidation plan.

The results: you end up paying almost the same amount at the end, and actually save $200 by not consolidating under Obama's plan.  Note that at the end of year 4, only 1 loan remained, I just had the person pay a constant amount per month for 12 months.  In actuality, the person would most likely put that $1,000 per month into the last loan, paying it off faster,and making the difference more pronounced.

Also note that when consolidating your loans, the first few years actually leave you with less remaining balance, since you aren't paying off high interest loans those first few years.  However, once you hit around the halfway mark (year 3) paying off the high interest loans actually pans out ahead.