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Student Loan Discounts

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Many lenders offer loan discounts to encourage borrowers to obtain their education loans from them. This section of FinAid discusses these discounts, their history, their benefits, and several caveats.

Why Lenders Offer Loan Discounts

The Higher Education Act of 1965 sets the maximum interest rates and fees on student loans. Nothing, however, prevents a lender from charging lower interest rates and fees. Lenders offer loan discounts for competitive reasons as they are increasingly competing with each other for the highly profitable student loan market.
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The Most Common Discounts

  • Direct Debit (ACH/EFT) Discounts: Interest rate reductions of 0.25% or 0.50% (Less common are 0.30%, 0.33%, 1.0%, 1.25%, 1.5%, 1.75%, 2.0% and 2.5% rate reductions, some of which also depend on on-time payment behavior.)
  • On-time Payment Discounts:
    • Interest rate reductions of 1% after 0 months, 1% after 36 months, 2% after 48 months. (Less common are split discounts, such as successive 0.5% rate reductions after 24, 36 and 48 months or successive 1% rate reductions after 24 and 48 months.)
    • Principal reductions of 3.3% (based on original loan balance) after 33 months, 7% (based on current loan balance) after 48 months. (Less common are split discounts, such as successive principal reductions of 1% at 24 months, 2% at 36 months and 3% at 48 months.) Some principal reductions may have a dollar cap (e.g., 1% principal reduction capped at $500).
    • Principal reductions of $295 or $595 after 12 months.
    • Credit for first 12 months interest applied after 12 months
    • Rebate origination fee of 3% minus $250 after 24 months.
  • Graduation credits of $250, $300, $500 or $750 (effectively a principal reduction upon entering repayment).
  • Forgive last 5 or 6 payments.
  • Forgive loan balance when drops below $600.

Discounts on Direct Loans

The US Department of Education offers two main types of discounts on Direct Loans:

  • 0.25% interest rate reduction for auto-debit
  • 1.5% rebate at the time of disbursement, retained by making the first 12 payments on time

Loan Discount Caveats

There are a few important caveats about loan discounts:

  • On-time payment is a difficult hurdle. Requirements that all of your payments must be paid on time (usually defined as within 10 to 15 days of the due date) are difficult to maintain. Even if you sign up for automatic direct debit of the monthly loan payments from your bank account, you can still lose these benefits by having insufficient funds in your account. If you are late with a single monthly payment, you lose the benefit permanently.

  • Rebates that must be repaid. Many fee rebates and principal reduction discounts include fine print that requires you to repay the discount if you consolidate your loan with another lender within a given time frame.

  • Minimum balances required for discounts. Many of the discounts require you to have a minimum loan balance to qualify, and the best discounts are reserved for borrowers who borrow the most.

Check out quick Tips for Evaluating Student Loan Discounts

 

 
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