Faced with the prospect of losing billions of dollars in subsidies from the federal student loan program, private lenders are looking to making their non-federal student loans more attractive which could result in lower fees and interest rates for borrowers who qualify.
The United States’ leading private student lender Sallie Mae announced that as from the 10th of May it will reduce the rates on its Smart Option Student Loan to a rate based on the London Interbank Offered Rate (known as LIBOR) to a 2.88% to 10.24% range instead of its current rate range of 4.38% to 12.88%.
Non-federal loans are commonly used by families to help pay for college costs that aren’t covered by federal student loans and financial aid. According to the College Board, $11 billion dollars were taken out by borrowers in the 2008-2009 academic year.
Due to a provision in the new health care reform law that states that subsidies for private lenders offering federally guaranteed student laws will end by the 1st of July, private lenders will suffer huge losses. Sallie Mae announced that these loses will result in the institution cutting 2,500 jobs.
The College Board claims that the credit crunch resulted in a dramatic drop in non-federal student loans in 2009. There was a drop of 50% in the volume of non-federal loans given out from 2008.
According to Patrick Kandianis, one of the founders of the website SimpleTuition, the drop in federal student loans combined with a strong economy is reigniting interest in non-federal loans. SimpleTuition helps borrowers compare student loan programs with ten major lenders offering their services on the site as compared to only two or three lenders offering their services a year ago. Kandianis foresees more companies being added to the site in the near future.
The number of credit unions enlisted in the Credit Union Student Choice has nearly doubled in the last year, reaching a membership of 126. The Credit Union Student Choice is a group that offers non-federal student loans to credit unions and according to Mike Webber the vice president of the group, new members are striving to remain in the business of offering federal student loans.
Advocates of student loans predict that rates for the majority of non-federal loans are variable and subject to surges if interest rates rise. Another risk involved in non-federal loans is that they don’t offer consumer protection as is the case in federal student loans. The president of the Institute for College Access and Success, Lauren Asher, warns of this risk which leaves borrowers in a more vulnerable position.
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