Archive for Tuesday, October 27, 2009

Federal student loans make better option

October 27, 2009


I can’t stand debt. One of my missions in life is to help keep people out of debt.

So I take it as good news that private student loans are declining fast. According to a new report from the College Board, the amount of nonfederal education loans in 2008-09 dropped by almost 50 percent from the previous year, and fell to 13 percent of the market from 25 percent a year earlier.

SLM Corp., commonly known as Sallie Mae, recently reported a significant drop in its private lending. In its third-quarter report, Sallie Mae, the nation’s largest student loan lender, said it had originated $893 million in private education loans, a decrease from $2.1 billion for the same quarter a year ago.

The reason for this trend is obvious. The terrible recession has broken a long-standing trend toward private loans, which generally carry higher interest rates than federally subsidized or unsubsidized loans.

Additionally, borrowers don’t get the same protections or perks. For example, the government pays the interest on subsidized Stafford loans and Perkins loans while a student is in school.

Subsidized Stafford loans are awarded to students who have demonstrated financial need. Unsubsidized loans are awarded regardless of financial need and students are responsible for the interest, although they don’t have to make payments while in school.

Clearly of the two types of loans, subsidized is better because with an unsubsidized loan, unpaid interest that accrued during the in-school period and the six-month grace period after leaving school is added to the loan principal.

“Students should always borrow federal first, as federal loans are cheaper,” said Mark Kantrowitz, publisher of and

The interest rate on federally subsidized Stafford loans was 6 percent in 2008-09. The rate dropped to 5.6 percent in 2009-10, and is scheduled to decline to 3.4 percent in 2011-12. The interest rate on unsubsidized Stafford loans is fixed at 6.8 percent.

Kantrowitz also points out that federal loans have better consumer protections, such as economic hardship deferment, greater availability of forbearances and flexible repayment programs.

Interest rates for private student loans currently range from about 9.5 percent to 10 percent, down about 1 percentage point from the previous year, says Tim Ranzetta, president of Student Lending Analytics, a California-based company that provides research and advisory services to college financial aid officers.

And these rates aren’t fixed.

“People should expect their private student loan rates to move up as the economy strengthens,” he said, adding that these borrowers typically see a 3 or 4 point interest rate increase from their starting point.

Still, about 15 percent of undergraduate students borrowed from private lending sources in 2007-08.

It’s no surprise that federal lending is growing and in 2008-09 accounted for 45 percent of the $125.7 billion in financial aid received by undergraduates, an increase of $14.7 billion from the previous year, according to the College Board.

Last year, Congress passed legislation raising the annual limit for unsubsidized Stafford loans by an additional $2,000 each year. The total federal loan limits (unsubsidized and subsidized) increased from $23,000 to $31,000 for dependent undergraduates, and from $46,000 to $57,500 for independent undergraduates.

The decrease in private lending can be attributed to these larger federal lending limits, tougher private lending standards, more student loan defaults and the inability of lenders to sell loans in a secondary market.

Is shifting borrowing from private student loans to federal good for students and their parents?

It certainly got a lot of thumbs up.

“Absolutely, it’s great that private loan borrowing is down, but with one caveat,” Ranzetta said. “Is this going to lead to overborrowing with federal loans?”

No doubt it will.

“We are very concerned some students are borrowing much too much,” said Sandy Baum, senior policy analyst at the College Board and former professor of economics at Skidmore College.

But Baum was quick to point out that the percentage of students borrowing incredibly high levels of debt is still relatively low.

Sixty-five percent of 2007-08 bachelor’s degree recipients graduated with education debt, and the median debt for those who borrowed was $20,000, the College Board reported.

About 6 percent of students at public schools had borrowed $40,000 or more. That percentage jumps to 24 percent for private schools. Among students who received graduate degrees in 2007-08, 7 percent had borrowed $80,000 or more for graduate school, and another 5 percent had borrowed between $60,000 and $80,000.

Whether it’s high-priced debt or lower-cost federal debt, it’s still too much for too many students and their parents.


SettingTheRecordStraight 8 years, 7 months ago

"So I take it as good news that private student loans are declining fast."

This article is basically a press release for a government takeover of the student lending market. Pathetic.

Of course government loans are going to be cheaper! Private industry is unable to fairly compete with our multi-trillion dollar federal government. The more we increase government competition, the more we harm private industry. Is your job next?

christy kennedy 8 years, 7 months ago

STRS, Let me get this straight: You are on the side of private, corporate lenders charging higher interest rates while families everywhere are struggling to pay for the higher education of students who will be our future workforce and consumers? Unless you're one of those accumulating wealth in this system, I don't see your point.

As for jobs, there will always be a need for student loans and people processing them. Private industry could compete, of course, but many in the money lending business have proved again and again to be just too damned greedy to offer the more reasonable terms needed by many students.

You mention fair competition. I'm all for it. And FYI, your tea bags are showing.

SettingTheRecordStraight 8 years, 7 months ago


That last line was a real zinger. Do you write for Leno and Letterman? You're that good.

And no, I do not support nationalizing yet another private industry. It is not the government's right nor is it the government's responsibility to take over entire industries simply because you choose to repeat a press release that claims "families everywhere are struggling."

My (fill in the blank with a perceived need) is not your responsibility just as your (fill in the blank with a perceived need) is not my responsibility.

person184 8 years, 7 months ago

STRS, Did you go to college? How did you pay for it? it is impossible to pay out of pocket for college these days and the federal student loan program has been in existence for a very long don't get all bent out of shape.

SettingTheRecordStraight 8 years, 7 months ago

"it is impossible to pay out of pocket for _"

person184, we could fill in that blank with every conceivable pet project that a human could think of. That doesn't make it the government's responsibility to provide it to you.

person184 8 years, 7 months ago

That's what I either didn't go to college or daddy paid your way.

SettingTheRecordStraight 8 years, 7 months ago

Or I transacted business with a local lender for my student loan and I didn't rely on other taxpayers to subsidize my way.

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