<p>For Federal Subsidized Stafford Loans ... would it be better to get the loan from a lender who offers:</p>
<p>1) a balance reduction of 2%
or
2) an interest rate reduction of 1%</p>
<p>(assuming everything else was the same)</p>
<p>Let us say you borrow $1,000 for 10 years at interest rate of 7%.</p>
<p>case 1: balance reduction 2% - net amount borrowed = $980. pmt = $11.31/mo, total int. paid = $377.52</p>
<p>Case 2: Borrowed=1,000 @ 6% (1% reduction), pmt. = $11.05/mo, total interest = $325.62</p>
<p>Does this answer your question?</p>
<p>If you have access to EXCEL you can run actual numbers specific to your case. Use following formula: </p>
<p>$/mo =pmt(%interest rate/12,# of months, amount borrowed,0,1)</p>
<p>so case 2 would look like:</p>
<p>$/mo =pmt(6%/12,120,1000,0,1)</p>
<p>total interest paid = # of months*$/mo - amount borrowed.</p>
<p>case 2 = 120*11.05 - 1000 = 326</p>
<p>To expand on Simba's example -- it depends on how you intend to pay off the loan. If you are only borrowing a small amount and think you will be able to accelerate payments to pay the loan off early, then the balance reduction could be the best deal. If paying only the minimum due monthly, over the full term of the loan, then interest reduction is the best way to go.</p>
<p>Some people actually take subsidized loans with the intention of paying them off, in full, immediately after graduation before the first payments become due -- so a principal reduction is a good deal for them. (This is very feasible for smaller amounts of borrowing and is simply a way of deferring expenses for awhile). </p>
<p>For every scenario, if you take the total amount borrowed and the full vs. reduced interest, there will be a break point at which interest payments catch up with the benefit derived from the principal reduction. So it is very possible to chart things out and figure out what that break point is in your case.</p>
<p>Thanks for expanding. That was the reason I gave him the formula and he can play with numbers and different scenerios himself.</p>
<p>Just remember to watch the fine print.....some of the repayment benefits only apply after you have made a certain number of on-time payments. Therefore, if you are intending on repaying the loan early and the benefits isn't until you have made 4 years of on-time payments, you can pretty much kiss it good-bye.</p>
<p>Some lenders are offering repayment benefits which take effect immediately upon entering repayment...those are the best because you stand a better chance of actually receiving the benefit.</p>
<p>Thanks for your help everyone!!!</p>