Sallie Mae Brings Back Deferred Payment Option

Sallie Mae is bringing back an option that lets students wait until after graduation to start repaying loans.

The private student lender, formally known as SLM Corp., had done away with its signature deferred payment option loan during the credit crisis in 2009.

At the time, Sallie Mae instead began requiring borrowers to make interest payments right away while in school. The company said the in-school payments helped defray long-term costs for students by reducing the amount of interest that accumulated on the loan.

The company was also looking to reduce its exposure to defaults during the credit crunch.
Students who are approved for loans in the 2011-2012 academic year will now be given three payment options:

  • Interest payments. Students who opt to make interest payments in school will be given a more favorable interest rate, which varies depending on their credit profile.

On a $10,000 loan, the typical in-school payment would be about $70 a month. The loan is repaid within seven years after graduation. Over the life of the loan, students would pay about $16,700 depending on the interest rate they’re given.

  • Fixed payments. A second option, which was introduced last year, requires a fixed monthly payment of $25. This comes with a slightly higher interest rate and a repayment period of 10 years. On a $10,000 loan, students would pay a total of about $20,000 over the life of the loan.
  • Deferred payments. Those who choose to defer payments until graduation are given the highest interest rates. The repayment period is 12 years. Students still get statements each month detailing how much they could save by making interest or fixed payments. On a $10,000 loan, students would pay a total of $23,100 over the life of the loan.

Currently, Sallie Mae said about 40 percent of borrowers opt to make interest payments and rest opt for the fixed $25 payment. Charlie Rocha, a senior vice president at company, said his early guess is that only about 10 percent of borrowers will opt for the deferred payments, which were made available Thursday.

Rocha said he doesn’t expect the reintroduction of the deferred payment option to dramatically increase the company’s loan volume.

That’s a figure that has dropped dramatically in recent years amid a tightened credit environment.

For 2011, Sallie Mae executives are projecting the company will originate $2.5 billion in private loans. That’s up from the $2.3 billion originated last year, but just a slice of the $7.9 billion originated in 2007.

The drop comes as private student lenders scramble to adjust to a changing marketplace. In March of last year, President Obama signed a law that essentially cut private lenders out of the federal loan program and made the government the primary direct lender to students. The market for private loans meanwhile has been shrinking; total private loan volume last year at $7.7 billion, down from $20.1 billion in 2007, according to The College Board.

Private student loans, which come with higher, variable interest rates, are seen as a last resort for families who have tapped out other resources, such as federal loans.

Sallie Mae, the nation’s largest student lender, has been restructuring and slashing jobs as it responds to the new law and increasingly emphasizes its servicing business for federal loans.


Leave a Reply

Be the First to Comment!

Notify of