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Wide White: With a rate that low, what's the point?

Wednesday, January 05, 2011

With a rate that low, what's the point?

Jamie has a federal student loan through Wells Fargo. When we got married it carried the highest rate of interest of any debt we had at over 7%.

What we didn't realize at the time is the loan is a graduated loan where the interest rate reduces after so many on-time payments in a row.

After a year or two it dropped to around 4% and a year or two ago it dropped to just over 2%, both times out of the blue for us since we didn't know what the schedule was.

This week we received a letter saying it had dropped by another 2% to 0.22%. Basically, Wells Fargo is loaning us money for free.

Yes, we make the minimum payment on this one. It's crazy to me. It's a Stafford loan so I imagine there's a government incentive attached to the rates, but I could be wrong.

I'm not complaining. I just can't believe they make any money on a loan at 0.22%. I understand the concept of an introductory rate of 0% since it always increases after 12-18 months, but a rate that declines over time? Wow!

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Blogger Reuben declared,

Wow! That's fantastic. By doing that, they're pretty much guaranteeing that you'll never make any effort to pay it back early. On one hand, I like that your good repayment behavior is being rewarded. On the other hand, it means that the people who probably need financial assistance the most (i.e. those not able to make minimum payments) are getting stuck with the higher rates.

1/05/2011 8:32 AM  
Blogger Joey declared,

"By doing that, they're pretty much guaranteeing that you'll never make any effort to pay it back early."

Exactly. When it was the highest interest of anything we had, I was very motivated to pay it off. As it's declined my attention has shifted and now that it's well below the rate of inflation, there's absolutely no reason to pay it off now.

1/05/2011 8:51 AM  
Blogger Tim declared,

Yeah, like Reuben said, it's not being done because they're being nice so much as it is that they don't want you to pay it all off as soon as you can. If anything, your good behavior is worrisome to them because it means they're not going to make money from fees and penalties off of you. :) As such, they want to keep the money from you coming in.

The other thing to keep in mind is that student loans are pretty much risk-free as far as lenders are concerned. They're not currently dischargeable in bankruptcy, so there's no chance of them being left hanging -- the government will ensure they get their money one way or another. This means that there's been no incentive for them not to give them out as long as they had access to enough capital to do it.

1/06/2011 9:25 AM  

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