This month, education loan giant Sallie Mae is launching its first fixed-rate private student loan to compete with federal student loans, which have historically been better deals for students because of low, fixed interest rates, as opposed to variable rates, and more protections for borrowers.
The private loans will have a fixed interest rate from 5.8 percent to 12.9 percent, depending on the credit worthiness of the student borrower or cosigner, usually a parent, and underwriting standards, Sallie Mae said in a statement. By comparison, the fixed interest rate on an unsubsidized federal Stafford loan is 6.8 percent and the fixed interest rate on a Parent PLUS loan is 7.9 percent.
Most private student loans offer variable interest rates, which can be better for borrowers if the rates stay low. But if the rates increase, borrowers can end up owing much more in interest payments. Sallie Mae’s private student loans, for example, have variable interest rates that range from 2.3 percent to 10.1 percent and are set to the Libor, or London interbank offered rate.
According to Sallie Mae, the company’s new fixed-rate loan will help alleviate concerns that some borrowers have about variable-rate loans.
“For some families that have concerns about how rates may change over time, it answers a need,” said Charlie Rocha, senior vice president for student lending at Sallie Mae (“Sallie Mae Competes with Feds for Fixed-Rate Student Loan,” Bloomberg Businessweek, May 7, 2012).
However, private student loans, even those with fixed rates, don’t offer the same protections for borrowers that are found with federal student loans, including income-based repayment and deferment options. And, unlike all other forms of private consumer debt, such as credit card debt, private student loans can’t be discharged in bankruptcy.
Sallie Mae, which had a $37 billion private student loan portfolio as of the first quarter of 2012, said it was offering the fixed-rate private student loans to boost education loan originations that were slashed after federal legislation stopped private companies from issuing federal student loans as of July 2010 and brought all federal student loan origination under the federal Direct Loan program.
The company said it expects to write $3.2 billion in private student loans this year. Already, originations have been on the rise, increasing in the first quarter to $1.2 billion from $940 million last year. Of the students who took out private loans from Sallie Mae in the first quarter, 88 percent had a parent of other adult as a cosigner.