Thoughts on Negotiating a Lower Rate with Your Lender

Michael Lux Blog, Lower Payments, Mailbag, Student Loans 1 Comment

A recent reader email described a very interesting situation.  The reader contacted Sallie Mae asking to sign up for the rate reduction program.  Sallie Mae (now Navient) informed him that they would be wiling to lower his rate to 3% for a year, but there was a catch.  Lowering the rate would require him to sign up for an extended length repayment plan.  In this case, 25 years.  This reader was a little reluctant to take the deal and wanted to know my thoughts.

Why would Sallie Mae/Navient do this?

Extending the life of the loan has an obvious result for the borrower… lower payments.  However, Sallie Mae has a huge motivation to make this change.  By paying less over a longer period of time you will spend more on interest than you would over a shorter loan.

By extending the loan life, Navient accomplishes two major things.  First, they keep a borrower current.  If payments are too high on the loan, many borrowers opt to pay nothing and collections and legal battles follow.  By lowering the payments, a borrower is in a better position to make each payment and this avoids ugly debt collection situations.  Secondly, the longer life means more interest, which is how Navient generates their profit.  If payments are applied mostly towards interest and very little towards principal, lenders are making a ton of money.

Is this deal with taking?

Despite the fact that your lender is clearly trying to get you to spend more money on interest, this deal could work in your favor.

First, year one at 3% is a very good deal.  The lowered interest means you can put a huge dent in your loan.

After year one, the deal can still work in your favor.  Suppose you were originally paying $500 per month, but with the new terms, your monthly payment is $300 per month.  If you pay the minimum $300 each month, Sallie Mae wins.  However, if you pay the $500 each month as originally planned, or better yet, more than $500 you will come out ahead on interest over the life of the loan.

Getting rid of student loan debt should be a priority.  If you are putting every penny you can spare towards your debt, the exact number of the minimum payment shouldn’t matter.  If anything, it provides you a little insurance policy in case you run into unexpected bills.  Car trouble that might otherwise result in a missed payment could just mean that you only pay the minimum for that particular month.

Sallie Mae/Navient’s Gamble

Your lender is betting that you will just pay the minimum.  If you realistically will only pay the absolute minimum, the deal will not be a good one.  However, if you plan on doing everything you can to pay off the loan, you can come out ahead.

If you have the self-control to continue to pay at your old levels, you will still get the loan paid off in the original amount of time.

One Important Note

This advice only applies if you are permitted to make more than the minimum payment.  If this new agreement creates a pre-payment penalty or somehow costs you extra money to pay off your loan early, run from this deal.  Otherwise, it is probably a good deal to take if you can hold yourself accountable to an aggressive repayment schedule.