Student loans affected by Health Care Reform Act

May 12, 2010

by Patricia Malek

Sallie Mae, the nation’s leading lender of non-federal student loans, announced Thursday it will lower the interest rates on its Smart Option Student Loan.

According to Sallie Mae’s press release, the interest rate on this type of loan will drop from a range of 4.38 to 12.88 percent to a range of 2.88 to 10.25 percent, based on the London Interbank Offered Rate index on which variable-rate loans are based. Smart Option Student Loans are private loans in which the student makes payments on the interest of the loan while attending college.

Roger Vick, director of financial aid, said Tech has no way of knowing how many students have taken out private loans at this time, but after July 1 students will have to provide private lenders with a form from the university indicating the cost of their attendance, so it will become easier for the university to track who is using these loans.

“For a number of years, there have been some students who have had to take them out because of loan limitations in the programs they were involved in,” Vick said. “If they need money beyond that they may go to private educational loans.”

He said some students in the aviation program use private loans to cover extra costs involved in the program that go beyond federal loan limits, and some nursing students use them to cover tuition costs if they are in school longer than the two years allotted by federal loans.

After one quarter in the aviation program, Jon Reichley faced this dilemma, choosing to change majors rather than take out a private student loan.

“The amount of money needed for the aviation degree is more than I could bear to borrow,” Reichley said. “I do not want to be paying loans off for the rest of my life, especially not for something that I won’t be able to do for the rest of it.”

Beginning July 1, under the new Health Care Reform Act, federal student loans will be funded only by the U.S. Department of Education, not by private lenders. Private lenders like Sallie Mae will only be able to administer private loans, so they are making these loans more attractive as a result.

Sallie Mae has added other perks to the Smart Option Student Loan in addition to lower interest rates. All fees have been eliminated. There is a Smart Reward incentive which allows borrowers on these loans to earn back two percent of the interest if they make payments on time.

If a student makes payments on time for 12 months following graduation, the cosigners of that student’s loan can be released from obligation, which is more quickly than in the past. Also, Sallie Mae is the first national private loan provider to offer borrowers loan forgiveness in the event of the death or permanent disability of the borrower. Students are allowed to cancel the loan if they find a better rate within three days of accepting the loan.

There are some negative aspects to the Smart Option Student Loan. Unless parents are willing to cover the payments, students must find part-time employment while attending college to make payments. Vick said these private student loans are variable rate loans, which are somewhat risky because borrowers are at the mercy of the current interest rate, but federal loans have a set interest rate, regardless of credit rating.

“The federal loans offer much lower interest rates,” Vick said. “As a matter of fact, this year it’s 4.5 percent for a Stafford subsidized loan, and there is no interest charged to the student while he’s in school and for six months after graduation. The Stafford unsubsidized loan will accrue interest while you’re in school, and that’s at a rate of 6.8 percent.”

He said students can defer payments on the Stafford Unsubsidized Loans until after graduation, but said that the interest accrues, so it’s more expensive to pay back a loan in that way.

“You will pay for it,” Vick said. “If you want to pay the interest while you’re in school and can afford to do it, that’s what you should do because it cuts down on the principal you’re paying when you get out of school.”

“We’re the financial aid office personnel not a fan of private loans because we think the interest rates are too high,” Vick said. “We’d like to have the opportunity to speak with the student about a realistic budget before they do something like that.”