Largest U.S. student lender Sallie Mae makes changes to loan plan

Largest U.S. student lender Sallie Mae makes changes to loan plan
Michael Del Moro

Published: Thursday, April 2, 2009
Updated: Thursday, April 2, 2009

Last week, the nation's largest provider of private student loans, Sallie Mae, introduced a new version of its signature loan that requires students to make interest-only payments before graduation, a change that could force borrowers out of the private market.

Sallie Mae began accepting applications for the new "Smart Option Student Loan" on March 23, and the loan will be available for the 2009-2010 academic year.
In the past, Sallie Mae's loan did not require payments until after graduation, but under the new plan, students must pay down the interest while still in school, according to Sallie Mae spokesperson Patricia Christel.
"The big plus, of course, is that when you graduate, what you owe is the same as what you borrowed," Christel told the Daily. "We really think that this loan lets you pay a little now and save a lot later, and that's a smart choice for anyone."
Students can save up to 40 percent and finish paying off their loans nine years earlier under the new plan because they will have already paid off all of the interest on the loan prior to graduating, according to Christel. This is about half the payment time observed under other student loan plans.
"If you just make interest-only payments while you're in school, it would definitely help you out once you graduate because it will be a lesser amount to pay back once you start buying your house and buying your cars," Sallie Mae spokesperson Erica Eriksdotter told the Daily.

The process of making monthly payments while still in school may prove impossible for some students, however, Tufts Director of Financial Aid Patricia Reilly said.
The change at Sallie Mae leaves fewer options for student borrowers and their families who cannot afford to make monthly payments while still enrolled at the university, Reilly added.
"The bad thing about [the new loan] is that for students who have high need or who are unable to make even the interest payments on the loan ... Sallie Mae may be no longer an option," Reilly said.
One hundred and seventy families at Tufts borrowed from Sallie Mae this year, which makes it the most popular private lender at the university, according to Reilly. Other lenders provided an additional 250 loans for financial aid.
Sallie Mae's popularity may be the result of the Massachusetts Education Finance Authority's (MEFA) suspension of its private student loan program from August to October last year, due to the credit crisis, Reilly said. Sallie Mae's private loans may become less widely used now that MEFA has restarted its lending.
MEFA offers fixed-rate loans, while Sallie Mae's loans have a variable interest rate.

Sallie Mae lent approximately $6.3 billion in private loans last year and projects the amount it will lend this year to be between $5.5 billion and $6 billion for the coming academic year.
The federal borrowing rate, however, is likely to increase, Christel said, due to changes to federal loan limits. The federal government has increased the limit for federal lending.

Christel called this change "great news" and said it would allow more students to take care of their financial needs with federal programs before moving to the private loan option.

Sallie Mae still encourages students and family borrowers to utilize savings and scholarships before attempting to secure federal loans, Christel said, leaving private loans as the third step in funding a college education.