Take out loan for Student Loan repayment? It’s worth it!
“An investment in knowledge still pays the best interest”, Benjamin Franklin, the founding father of today’s USA, who died in 1790, already knew that.
Students in Germany receive financial support from the Student Loan, which is only half repayable. Another up to 50% discount is available if the loan is redeemed early and completely. Many former Student Loan recipients are therefore considering taking out a loan to repay Student Loan debts. Find out in this article whether this route is actually worthwhile.
This is how the Student Loan works
Before we deal with the repayment, let’s take a brief look back at how the Student Loan model is built. Students who cannot finance their studies out of their own pocket or with the support of their parents can apply for state support in the form of Student Loan. If a student receives around USD 400 per month, USD 200 is to be regarded as a government grant and USD 200 as an interest-free loan.
Repayment begins after 5 years
The maximum funding duration corresponds to § 15a of the Student Loan law of the standard period of study plus possible credits through training or internships. About 4.5 years after the maximum funding period, former Student Loan recipients receive an overview of their debts in a letter from the Federal Administrative Office. Repayment begins after 5 years, i.e. about 6 months after the notification.
So much has to be paid back
Assume that a total amount of 10,000 USD is to be repaid. Debtors then have two options:
- The repayment is made in constant monthly installments of 105 USD each. The actual payment will be debited once per quarter for USD 305 by direct debit.
- The repayment is made in one sum. In our example, a discount of 28.5% is granted. The amount actually to be repaid is thus reduced by $ 2,850 to only $ 7,150.
In the information sheet on the repayment of Student Loan, published by the Federal Ministry of Education and Research, you will find a table with the discounts granted.
Loan for repayment
We stick to our example of repayment over 10,000 USD. We now decide to make a repayment in one sum. If no money was saved to pay the debts out of your own pocket, you can consider taking out a loan. This seems to be lucrative, especially in times of low-interest rates. But is it really worth it?
Good Finance offers a special loan for Student Loan repayment at an effective interest rate of 3.90-4.94% pa (depending on the term). Since we pay our debts in one sum, we need 7,150 USD from the bank. We want to apply for this amount from the Netbank. We receive the following offers:
- Repayment over 80 months: monthly installment of 104.72 USD. Savings compared to regular Student Loan repayment: 1,622.98 USD or 16.23%.
- Repayment over 60 months: monthly installment of USD 134.38. Savings compared to regular Student Loan repayment: 1,937.68 USD or 19.38%.
- Repayment over 36 months: monthly installment of 213.76 USD. Savings compared to regular Student Loan repayment: USD 2,305.14 or 23.05%.
If we could pay the amount of 7,150 USD without borrowing, we would save 2,850 USD or 28.5%! In our example, even taking out a loan can save between 16% and 23% compared to regular Student Loan installment payments. In general, the shorter the repayment period of the loan, the higher the savings with the Student Loan repayment.
On the Netbank homepage, it is possible to calculate how high the savings will be when borrowing to repay the Student Loan.
When to refrain from a loan
As nice as the savings on a Student Loan repayment through a loan are, there are situations in which you should rather accept the offer of the Federal Administrative Office with regular repayment in installments. For example if:
- You are not sure whether you can actually service a bank loan with the monthly charge permanently. A loan default can be expensive due to the interest charge.
- You have more than 16,500 USD in Student Loan debts and started your studies after February 28, 2001. In this case, the debt is capped at 10,000 USD and regular debt repayment is sufficient.
In many cases, taking out a loan to repay Student Loan debts is interesting and financially lucrative. Loan interest rates are currently extremely low, see loan comparison, which means that large savings on regular installment payments can be achieved. In our example, no further benefits, such as those due to good academic performance or early completion of studies, were taken into account.