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. It also includes comparison charts that list the loan discounts offered by the most popular education lenders.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. (The illegal inducements regulations prevent lenders from providing immediate rebates, which would be akin to paying borrowers for their loans. However, most lenders work around these restrictions by instituting a one month delay in rebate-style discounts, or by providing the discounts when the loan enters repayment or at other milestones.)
Lenders offer loan discounts for competitive reasons. Originally the competition was with the Direct Loan program. However, with the repeal of the single holder rule, lenders are increasingly competing with each other for the highly profitable student loan market.
Since the repeal of the single holder rule on June 15, 2006 allows borrowers to consolidate their loans with any lender, the originating lenders face a risk of losing their borrowers to other lenders. They are responding by offering better discounts on unconsolidated Stafford and PLUS loans, by instituting discounts that depend on longevity with the lender (e.g., rate reductions and principal reductions after so many months into repayment and waivers of the last six monthly loan payments), and by requiring certain discounts to be repaid if you consolidate with another lender. The originating lenders can offer better discounts on unconsolidated Stafford and PLUS loans because lender margins are tighter on consolidation loans.
The Most Common Discounts
The most common loan discounts include a 0.25% interest rate reduction for having your monthly loan payments direct debited from your bank account (and also often requiring online electronic statement delivery). Many lenders also waive the origination fees on Stafford Loans. Depending on the guarantor, they may also waive the 1% default fee (previously "guarantee fee").
Many lenders also offer additional discounts for making all of your monthly payments on time. For consolidation and PLUS loans many lenders offer a 1% interest rate reduction after 36 months of on-time monthly payments for as long as you continue making on-time payments. The on-time payments must be consecutive (no skips) and start when the loan enters repayment. (A few lenders offer a "repair option" which resets the on-time payment clock, but most lenders require all the initial monthly payments to be on-time.) For Stafford loans the most common discount involves a 2% interest rate reduction after 48 months of on-time monthly payments for as long as you continue making on-time payments. A recent trend is to replace these interest rate discounts with principal reductions after reaching a milestone, such as 3.33% principal reduction after 33 months.
The most common loan discounts include:
* 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:
o 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.)
o 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).
o Principal reductions of $295 or $595 after 12 months.
o Credit for first 12 months interest applied after 12 months
o 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
Tim Ranzetta of Student Lending Analytics obtained data from the US Department of Education concerning the utilization of these rebates. He reports in his blog that 18.6% of Stafford loan borrowers, 40.4% of PLUS loan borrowers and 47.0% of consolidation loan borrowers qualified for the rebate from August 2001 to October 2008. It is curious that successful utilization rates were lower for consolidation loan borrowers seeking both a rebate and an interest rate reduction than for consolidation loan borrowers seeking just a rebate. More recent YTD utilization rates are more successful than the long-term utilization rates. FinAid has transcribed the data from his FOIA request into a spreadsheet that analyzes the loan discount utilization rates.
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