Private student loans become a viable option

http://www.savingforcollege.com/articles/20101015-private-student-loans-become-a-viable-option

Last year, more than two-thirds of federal student loans were distributed by private financial institutions, says Kevin Walker, co-founder and CEO of Boston-based SimpleTuition Inc., which provides college loan comparisons and college financial advice. It's not the case anymore.

Thanks to the recently passed Health Care and Education Reconciliation Act, the U.S. Department of Education has offered all new federal students loans since July 1, 2010. Private financial institutions no longer offer any federally backed student loans, but they are certainly offering their own private student loans.

To compete with the federal government loans, these private student loans are becoming more attractive than ever.

"Under (the new) process known as direct lending, students apply for federal loans directly from the government," says P.K. Parekh, director and general manager of Discover Student Loans, the student lending arm of Discover Bank in Salt Lake City. "While this change was not a surprise to us, it is a significant adjustment for schools and students, and we are supporting them as they make the transition."

Reversing private companies' retreat

As the credit crisis took hold over the past couple of years and more banks and private lenders understood that private involvement in federal student loans would come to an end, a number of private financial institutions exited the marketplace, Walker says. However, now many lenders are back in the game and offering private student loans that are worth a look.

"The trend has reversed with a handful of new and returning lenders offering private student loans for the 2011 academic year, bringing the total number of nationally available lenders to the low teens," Walker says. "In addition, there are a number of credit union, small bank and state-based loan programs available."

Private student loans with benefits

Not only are private student loans available, but lenders are beginning to bring back "borrower benefits" -- the incentives offered to borrowers to distinguish one loan from another, Walker says. Some of these benefits include interest rate reductions for auto-debit of payments or a certain number of on-time payments. Some companies also reduce the debt as a reward for graduation while others save students money by allowing them to make small interest payments while still in school.

In addition to offering borrower benefits, private student loan providers are starting to offer more flexibility and customization in repayment and terms, Walker says. "For example, look for lenders to offer a choice of fixed or variable rates and possibly different terms when a student elects to make in-school payments of interest or principal," he says.

According to a recent survey conducted by SimpleTuition, students and parents can expect some of the following deals from private lenders:

• Lower rates among the top five lenders, including a drop of as much as 2 percentage points at one of the largest lenders.
• Seven lenders not charging origination fees.
• The return of -- and increases in -- borrower benefits, including discounts for automated payments.
• Shorter repayment term options, which can potentially save students thousands of dollars.

For instance, Sallie Mae, a leading company in planning and lending for college, has recently lowered interest rates, eliminated disbursement fees, developed a new payment option to help more students save money over the life of their private student loan, and introduced other new enhancements, says Patricia Nash Christel, a spokeswoman for Reston, Va.-based Sallie Mae Inc.

In June, Sallie Mae announced a new $25 per month fixed payment plan. "For the price of two pizzas, or less than a dollar per day each month, college students can keep their student loan interest in check and ultimately save an estimated 30 percent in interest charges," Christel says.

Typically, a customer using the in-school payment plan could retire his or her private student loan within 10 years after graduation rather than the standard 15-year term, Christel says. By paying some or all of the interest each month while still in school, student borrowers can save 30 percent to 50 percent in interest costs and complete payments much sooner.

Sallie Mae isn't the only company offering attractive private student loans. For example, Discover Student Loans recently reduced the lowest eligible interest rate on its Certified Private Loans program, and as an extra benefit, the company gives students a 2 percent graduation reward.

Future Outlook

As the credit crisis eases, Walker believes more lenders will return to the private student loan space with attractive offerings.

"Banks have always liked the student loan category because it offers a chance to establish a relationship with a young, upwardly mobile consumer who will need deposit accounts, investment advice, auto loans, mortgages and other products in the years ahead," he says. "With federal loans, and to some extent credit cards, being no longer available as offerings for these consumers, private student loans have become a valuable way to land a customer for a lifelong relationship."

Posted October 15, 2010