Student loan debt 101: Avoid programs like SafeStart

Student loan debt 101: Avoid programs like SafeStart
Zac Bissonnette
Aug 17th 2009 at 10:00AM More
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Filed under: College, Debt

In a piece in The New York Times, Ron Lieber writes about SafeStart, a new program for student debtors that I recently discussed here. The way the SafeStart program works is this: A student (or more likely his parents) pay a fee of $40 to $70 for every $1,000 borrowed through the federal Stafford loan program. Then if the student runs into problems paying off the loan and can provide proof of hardship, SafeStart will make the payments on the loans for 36 months. The offer only applies for the first 5-years of post-graduation life and borrowers only have 36 60 months to pay back the interest-free loan made by SafeStart.

A chance at a 60-month interest free loan at any point during the first five years of graduation sounds like a very, very low return for an origination fee of 4% to 7%. And what if you can't pay the loan back within 60 months?

But the real reason that SafeStart is such a horrible idea is that Income Based Repayment already allows students with little or no income to make little or no federal student loan payments -- without a 4% to 7% origination fee or a requirement that they pay the money back within 36 months.

If SafeStart applied to private student loans, it might in fact be a very valuable service -- although the default rate on private loans would likely make it unprofitable. But in its current form, it's very expensive and provides something less valuable than what is already available for free.

It's just another example of services offered parents and students who haven't done their homework.