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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.

By MSN Money Partner May 21, 2012 1:01PM

This post comes from AnnaMaria Andriotis at partner site SmartMoney.


Image: College graduate (© Corbis)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:



May 22, 2012 12:45AM

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.

May 22, 2012 12:42PM
The student loan rate should be lower than 6.8 percent. The loans almost bankruptcy proof and there isn't anyway out of these loans unless you die. You almost always have to pay back a student loan one way of another, so why aren't these rates lower?
May 22, 2012 8:50AM

Hell, I could retire on what some people pay to go to college.

May 22, 2012 8:43AM
I wish these students had the brains to get together and all take a semester off. Then these overpriced college tuitions would drop if they saw nobody attending.
May 22, 2012 9:13AM
It's been over 1,100 days since the United States Senate, under the leadership of Harry Reid, has passed a budget.  Sen. Reid has candidly admitted that the reason he has refused to bring a budget to the floor for a vote is that he doesn't want his Democratic colleagues to have to take a tough vote during an election year.
May 22, 2012 9:56AM
College loans interest rate should only be 2%, its not right interest rates are so high then they wonder why students and parents CAN'T pay them back.....geez!!!!!!
May 22, 2012 9:13AM
Dont take student loans, work hard and go to community college and take as many classes as you can while working.  You dont have to graduate in 4 years! Try to apply for scholarships if you get them it actually isnt a bad paying job.  Spend smart and avoid the pitfalls of the entitlement generation.  A college degree wont get you that dream job right away but you can learn a trade while in college and can graduate with experience and a degree.  
May 22, 2012 6:57AM
Another example of unconstitutional government overreach crowding out the private sector, putting taxpayers on the hook for huge losses, and offering service inferior to private enterprise.
May 21, 2012 11:38PM
Get real.  The reason these loans are about to screw so many people is that they can defer them for almost no reason at all.  Even with a collage education they don't see past today and keep putting the loan on deferment so they don't have to pay it now.  Meanwhile it keeps slowly adding interest and soon the rate will balloon.  I know several people been out of school years and still never made first payment on their school loans because they put them off.  Yet they are driving brand new cars, buying boats etc...  If this blows up in their face its their fault.
May 22, 2012 1:14PM
I just graduated college and am paying off my student loans paying all my bills ON TIME each month.  The interest rates on these loans are ridiculous.  I have both Stafford Loans and Sallie Mae loans.  I used a co-signer with GOOD CREDIT on the Sallie Mae Loans and the interest rate ranges from 8.9% to 10%.  The Stafford Loan interest rates are at the highest 6.8%.  Sallie Mae (depending on the loan) has repayment terms of 10-25 years, however if you dont have a minimum of $30,000 in student loans through them they will not allow you to extend the repayment terms to a 25 year term which leaves people who can't pay the full amount each month and Sallie Mae wont work with them on a cheaper payment option no other choice but deferment.  I know everyone has their opinion on this subject but this is what I have experienced thus far and I just graduated last year.  I'm sure more people would be able to pay back their student loans if the lenders would work with them instead putting a $30,000 minimum before they will help to lower the payment.
May 22, 2012 11:27AM
This should not be a government function. If they are going to forgive loans for education, I want my education money refunded to me also. Thats the problem with this country. Someone always wants something for free. I want you to send me a check for paying my education, and a check for paying my mortgage, and a check for buying my own food. Where's my food card. Maybe I should quit work and just suck off the entitlements. If I don't have a job and don't want to work, you will give me everything for free.
May 22, 2012 4:16AM
I don't know what the terms of these loans are? If it's a variable rate, stepped up rate-----tough sh-t----pay it just like everybody else does. Oh, I was stupid when I signed it? Oh, I didn't know then what I know now? When it comes time to pay, it's the age old too dumb then and too smart now. Why pay it when you can just plead poverty and BO will just give the government away. Awwwwwww, 1 more supporter. BS. You signed a contract. You agreed to the terms. Now, it's time to pay.
May 22, 2012 1:15PM

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.

May 22, 2012 1:32PM

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.

May 22, 2012 2:15PM
All I can do is shake my head.
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.

May 22, 2012 3:34PM
     What most people miss is that outside the U.S., many foreign government heavily subsidize higher education.  They understand the value of an educated work force.  Just like everything else, something needs to be done to help control the rising cost of tuition, but at the same time, college students need access to funding for their education, whether it be from scholarships or student loans.  Especially now, where many families" college savings have been wiped out by the recession.
      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. 
May 22, 2012 2:17PM
Mr Moderate what exactly are you blaming the Repubs for?
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?

May 22, 2012 6:18AM

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.

May 22, 2012 6:27AM
boo hoo ... those greedy bankers lent me money.  Now  they have the audacity to to demand that I pay it back. Moderate should shut up. They know no facts, or the truth, only hate speech and smear.
May 22, 2012 8:28AM
If I would need a student loan it would be best to borrow a federal loan. A typical bank will have a thousand and one hidden fees.  And, borrowing from a bank you would need to pay for the cost of an attorney just to understand what you might be signing.
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