Cheaper Private Loans?

With defaults rising and investor confidence low, banks and other lenders are rethinking the way they structure private student loans.

Sallie Mae will begin requiring borrowers who take out its private loans to make interest payments while they are still in college and repay their loans in 15 years or less, rather then the typical term of 15 to 25 years. The company's goal is to reduce the costs of borrowing thereby lowering the risk of default, and making private loans more attractive to investors.

Sallie Mae provided this example to illustrate how the loan will work for a student who wants to borrow $17,000 over two years.

For the first semester of freshman year, the student would pay $40 a month. That figure would rise each semester, reaching $160 by the second semester of the sophomore year. The $160 monthly payments would continue until graduation. Once out of school, the student would owe only the principal of $17,000.

This would be paid off over the next six years at $328 a month. Under the previous setup, the student would have repaid the money over 15 years at $250 a month. The new requirement will lower the total cost of the loan to $28,000, compared with the previous $45,000.

The changes will apply only to private loans, where a growing number of students use to cover the gap between their grant aid and federally subsidized loans, and the cost of attending college. Private loans are not federally guaranteed and tend to carry higher interest rates then federal loans.

The changes could push more borrowers to federal loans. Parent PLUS loans were retooled last year to allow parents to wait until their kids had finished school before beginning to repay the loan. Previously, the program required parents to start repayment within 60 days of the loan being issued.

Chronicle of Higher Education and WSJ