breaking down the LIBOR index rate

LIBOR (acronym, proper noun) - London InterBank Offered Rates, see also, "bane of my existence."

Having essentially knocked Wells Fargo out of the running as a lender to consolidate my private student loans (remember? they need me to apply with a cosigner, and right now, I don't have anyone to who can do that for me), I'm back to cuStudent Loans.

cuStudent Loans offers only a variable interest rate, as I mentioned in my first post on this topic. When they receive your application in full, they review your credit and offer you an interest rate between 4.25-6.75%. That base rate is then COMBINED with the LIBOR index rate to give you what you actually will pay every month. In the simplest terms (for me, I'm a finance dummy), LIBOR is the international market standard for short-term interest rates. Yep, that's it! It's published by the Wall Street Journal. (Here's a good article on LIBOR.)

Currently, LIBOR rates are at a historic low. We're talking .22% in September.

Say I had already consolidated with cu and they gave me an interest rate of 5%. For September, I would have paid 5.22%. Pretty amazing.

Base rate 5%
+
LIBOR index September .22%
=
Interest rate for September 5.22%

The downside to having this variable rate, that includes the LIBOR, is that rates haven't been and won't always be as low as they are right now. This math is also NOT PERFECT -- cuStudent Loans gives you a quarterly rate - so it would really be the average of 4 months you would pay. This is just an example.

You can see a full chart of LIBOR rates dating back to its inception in 1989 here.

The historically highest rate is 9.125%, reached in November 1990. (Please feel free to correct me if you catch something I missed!) By my findings, it has only reached 9% one other time - 9.063% in September 1989.

That's a long time ago. There are only a handful of times since 1989, that LIBOR has reached 8%, as well.

The trend, in my rudimentary analysis, seems to be the rates rise from 1-2% to 5-6% over a few years, then dip back down. Those highs of 8 & 9% and historic lows we're at now are rare.

Now, let's do the math again.

Base rate 5%
+
LIBOR hypothetic rate 8%
=
I pay 13%

That's a big number. Sadly enough, though, when I broke down the numbers of what I'll owe Sallie Mae over the next 17 years, even at 13-14% during higher interest rate times, I'll be paying less than what I would through Sallie Mae. But what if shit hits the fan, and I hit cu's interest rate ceiling of 18%? That means my combined base rate + LIBOR index can never be above 18%. I will never pay more than that.

Well, my payments would be $650. That's $90 more than I will pay with Sallie Mae at the peak of my repayments. That's bad. ON the other hand, I'm scheduled to pay Sallie Mae $465 for six years. Judging by the LIBOR trend, I 1) will most likely never hit the ceiling and 2) if I ever did, it's hugely unlikely it would be sustained for any amount of time.

In the end, FOR ME, the math comes out on the side of consolidating, even with a variable interest rate.

Total amount repaid to Sallie Mae over the next 17 years (not including the 3 years I've already been paying): $93,500

Total estimated amount repaid with cu consolidation (my math): $72,000.

I got there by assuming a payment of $400/month over the 15 year repayment term with cu. That's more than I will pay with interest rates as low as they are right now and probably less than I will pay at some points in the next 15 years. In the end, maybe I'll only save $10,000 and end up having to pay $13,500 because interest rates hit higher marks. Or, maybe I'll get lucky and save even more than I estimate.

For me, the gap of $21,500 of potential savings is worth the risk.

**Please feel free to leave me tips or advice or correct any math mistakes you see. I'm open to constructive criticism and learning more about these topics!

//quote on top is courtesy of Mel at thethingtheymade.blogspot.com. Thank you for being a friend.