Student loan price war: Banks vs. feds
For the first time ever, students might find it cheaper to borrow from a private bank than from the federal government.
This post comes from AnnaMaria Andriotis at partner site SmartMoney.
Though most banks traditionally offered only variable-rate student loans, a growing number recently began giving borrowers low fixed-rate options. On Monday, Sallie Mae and Discover, the first and third largest private student loan lenders, respectively, became the latest to offer fixed rates. They join Wells Fargo, the second biggest lender in the space, and five other private lenders in total, according to FinAid.
That's up from just one bank a year ago. Sallie Mae's fixed rates start at 5.75%, which is lower than the 6.8% rate on federal unsubsidized Stafford loans. It soon may also be cheaper than the subsidized Stafford loan -- whose rates are expected to spike to 6.8% this summer, up from 3.4% currently.
For years, students turned to private banks after exhausting their annual allotments for both the subsidized and unsubsidized federal loans. Traditionally, rates were not only higher on private loans, but variable. Typically tied to the prime rate, the monthly loan payments could rise substantially over the course of repayment -- and might even become unaffordable.
The trend toward fixed-rate private loans picked up over the past year. Lenders are cognizant that borrowers want to protect themselves against a rising-rate environment, says Mark Kantrowitz, the publisher of FinAid.
The changes also come as tuition costs continue to rise, free aid becomes harder to get, and more families turn to loans to fill in the gaps. More than 1.8 million bachelor's degree recipients are projected to graduate this year with college loans, up 41% from five years ago, according to FinAid. (Post continues below.)
To be sure, experts say it would make sense for few borrowers to opt for a private loan before exhausting the federal options. For one, while federal loans offer the same rates to all -- regardless of credit -- the lowest rates on the private loans are strictly for borrowers with blemish-free credit reports. Undergraduates will likely also need a co-signer. Also, if the subsidized Stafford rates spike to 6.8% this summer, this loan could still be cheaper for undergraduates since the government will continue to cover their interest payments while they're in college.
And even for those who qualify for Sallie Mae's lowest fixed rate, the savings could be small: On a $10,000 loan over five years, borrowers will pay $1,530 in interest with Sallie Mae, $294 less than they'd pay on an unsubsidized Stafford loan. (For borrowers who need more years to pay off the loan, the savings with the Sallie Mae loan would be larger.)
Other lenders' fixed-rate loans are still slightly lower than the government's. Discover's lowest fixed rate is 6.79% while Citizens Bank and Charter One's start at 6.75%.
Borrowers with good credit who are planning to pay off student loans in the next couple of years could use a different strategy. Starting rates on variable-rate private loans are at rock-bottom lows. Sallie Mae's start at 2.25% while Discover's start at 3.25%.
If borrowers can qualify for those rates and plan to pay off the loans in the next two years -- the Federal Reserve has said it plans to keep rates unchanged at least through 2014 -- these loans could be more affordable. A borrower who pays a $10,000 loan with a 2.25% rate over two years would pay a minimum $236 in interest, or at least $487 less than they'd pay the government.
But those savings might not be worth it for borrowers who think they could be stuck with the loan longer term when rates are likely to start rising.
More on SmartMoney and MSN Money:
The student loan bubble is on the rise with the increasing need of higher education and tuition costs. The student loan bubble will burst like all the other bubbles devised to take advantage of peoples needs. Increasing the interest rate just means the bubble will inflate quicker and make a louder pop.
People wonder why the cost of an education is going up, it is these loans. They amount to indentured servitued. Just like the housing market, loans will spike the cost of an education until that system collapses, but it wont. The big difference being that you can not walk away from a student loan.
So unlike the housing bubble and crash, there is no foreclosure or bankruptcy out of this path. Truely, indentured servitude is back. Slavery may be "illegal" but financial slavery is alive and well.
The GOP is putting the masses back on track to be owned by large companies through on the job training via loans which are inescapable. Credit ratings will be layed waste if you are late and collectors will hound and black list you from all employement. Welcome to American slavery.
Ok, is it just me or is there some SERIOUS margin here to be made:
You can't invest your money and make ANYTHING these days, you're lucky to get 1% on a CD, and the stock market is a crap-shoot, and mutual funds are going nowhere, but you can charge 5+% on a student loan.
Some people have enough investment money they actually COULD MAKE THAT LOAN. Why not go for 5% or 4% in an economy where getting that kind of return is almost impossible? People should start making their own student loans. Its not like they can welch on you, you can't discharge a student loan through bankruptcy, so you'll get to at least garnish their wages, and they're YOUNG.
5% is ridiculous. Its ReeeeeDICKulous. Its ReeCOCKulous.
One of the reasons of the housing bubble was easy money. The reason the costs of higher education is going up? Easy money and some of you want the money to be easier?
Good Luck with that.
The average American (read middle class and below) can't attend college without some kind of student debt. In a job market where applicants that don't have a college degree are immediately round filed, college isn't an option it's a necessity. Now, I am in favor of government lending for college being tied to the major you are pursuing. If you are going to major in a needed skill, such as engineering or a medical professional, I support those students getting special rates on loans to encourage U.S. students to pursue those career paths. However, if you want to major in a 5,000 year old dead language or a degree with limited career and earning potential, that student should be viewed as a higher credit risk and have a more difficult time getting government funding for their degree.
Do any of you know why you can't remove student loans though bankruptcy?
Because doctors, lawyers and other high paid professions would rake up hundreds of thousands of dollars of debt and then get a good and file for bankruptcy.
If you could wipe them out in bankruptcy, If you are a teacher and have 100k in debt, why wouldn't you file?
The lenders will no longer lend money , if the borrowers don't pay back what is borrowed. If so many did not default on loans, the interest rate would be much lower. that is common sense. when student loans are not paid back, that shrinks the pool of money available for future generations.
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