An Easy Way to Reduce Student Loan Interest
Trying to cut staggering loan delinquencies and get an edge in an increasingly competitive market, the nation’s biggest student loan lender says it will significantly reduce interest rates for certain punctual borrowers.
Student Loan Marketing Assn., better known as Sallie Mae, recently announced that it would automatically cut rates on new and some existing Stafford loans--the most prevalent federally subsidized loan--by 2 percentage points for borrowers who make the first 48 payments on time.
Sallie Mae, a financial intermediary that buys student loans from banks and repackages them for sale to investors, says it has a simple motive for cutting loan rates through its new Great Rewards program. It’s costly to collect delinquent loans. Every time a payment is more than 10 days late, a collection mechanism is triggered. And because 20% of Sallie Mae’s borrowers are late in any given month, that starts to add up.
However, industry experts believe that there’s more to it than that.
The federal student loan program has become highly controversial in the last several years largely because of staggering default rates on these government-guaranteed credits. In 1990--the most recent year for which statistics are available--the net default rate on guaranteed student loans was 10.4%, up from 9.6% the prior year. The national cohort default rate, which measures what percentage of borrowers stop paying in the first or second year, was a whopping 22%, versus 20.1% in 1989.
(By way of comparison, only about 6% of credit card borrowers default on their loans. And the high risk of default is often cited as a key reason for lofty credit card interest rates, which cost more than 17% on average.)
Between defaults and subsidized interest rates--Stafford loans now cost 6.9%--guaranteed student loans cost taxpayers about $5.3 billion in 1991 compared to $3.8 billion in 1990. The increased cost was primarily the result of rising defaults, according to a spokesman at the Department of Education.
About $15 billion in Stafford loans are originated annually, and there are about $60 billion in loans outstanding. And the program is in the process of being expanded.
Starting in 1993, these loans will be available to all students, regardless of their parent’s income. In the past, they were granted only to families with some financial need--generally those earning less than $50,000 annually.
But in response to the sorry default statistics, Congress last year authorized a new pilot program that would allow certain colleges to bypass banks when making student loans. Some Congressional leaders estimate that direct loans could save the government about $200 million. If the program is successful, it could be expanded from the initial 250 to 400 colleges to include the bulk of public colleges and universities, industry experts say.
Although some lender-generated loans will probably survive regardless of the direct loan project, many believe that competition for these loans will increase significantly.
Sallie Mae may be trying to give itself a competitive advantage through offering its Great Rewards program, said Kalman A. Chany, author of the Princeton Review Student Access Guide to Paying for College.
Students who plan to pay off their loans will begin to request Sallie Mae, Chany predicts. That should increase Sallie Mae’s market share and lower its default rate at the same time.
(Certain banks, including Bank of America, Wells Fargo, Chase Manhattan and Marine Midland, agree in advance to sell all their student loans to Sallie Mae, which owns one in every three student loans.)
However, the fact that Sallie Mae has something to gain doesn’t detract from the fact that the program is a great deal for students.
Great Rewards would save you $250 if you owed $5,000. And students with more significant debts can save substantially more. An undergraduate with the maximum in Stafford debt--$23,000--would save $1,100 in interest payments, Sallie Mae says.
There’s no cost to sign up for the program. No added obligation. You don’t even need to apply. The cuts are automatic.
The program will be available to students who receive Stafford loans after Jan. 1, 1993, or to those who enter the repayment phase after July 1, 1993. Those who want to participate simply must make sure they have Sallie Mae loans.
How? If you are planning to get a new Stafford loan, contact your college financial aid office to find out which local lenders sell all their loans to Sallie Mae. Then apply only to Sallie Mae lenders. (For safety’s sake, you might call the lender to make sure your loan will be sold.)
After that, all you have to do is make your payments on time, said Sallie spokesman Ross Kleinman. In four years, you’ll start seeing the interest rate cuts.
What about existing loans? If you have Stafford loans that don’t go into the repayment phase until after July, 1993, you can contact your lender to see if the loan has been--or will be--sold to Sallie Mae. If it is, you’ll be automatically enrolled in the Great Rewards program, Kleinman said. But if the lender doesn’t sell its loans to Sallie--and won’t at your urging--there’s little you can do.
