Sallie Mae Creates New Student Loan Product to Replace Current Private Loan

Sallie Mae Creates New Student Loan Product to Replace Current Private Loan

What is Sallie Mae?

According to their website,

Sallie Mae®, the nation’s leading provider of student loans and administrator of college savings plans, has helped millions of Americans achieve their dream of a higher education. The company primarily provides federal and private student loans for undergraduate and graduate students and their parents.

In addition, Sallie Mae offers comprehensive information and resources to assist students, parents, and guidance professionals with the financial aid process. Sallie Mae owns or manages student loans for 10 million customers and through its Upromise affiliates, the company also manages more than $17.5 billion in 529 college-savings plans, and is a major, private source of college funding contributions in America with 10 million members and $450 million in member rewards. Sallie Mae employs approximately 8,000 individuals at offices nationwide.

Sallie Mae was originally created in 1972 as a government-sponsored entity (GSE). The company began privatizing its operations in 1997, a process it completed at the end of 2004 when the company terminated its ties to the federal government.

Sallie Mae is listed on the Fortune 500 and is one of the Top Innovators in IT according to InformationWeek. The company also has been recognized as one of the 100 Best Corporate Citizens according to Business Ethics magazine and one of the top 30 companies for executive women by the National Association of Female Executives.

Sallie Mae Creates New Student Loan Product

Well the Wall Street Journal has reported, that Sallie Mae has created a new student loan product (full story HERE).   The product is pretty straightforward and actually makes a ton of sense, however it replaces their current private loans.

The product takes away the option to defer interest on the student loan while the student is a full time student, rather than letting it accrue while you are a full time student.   We can use My Journey as an example:

  • I have mentioned my two loans from law school in the past .  Luckily these student loans are not private loans and are fixed at 5% and 4%.  Some of the underlying debt was both subsidized, i.e. interest was not running, and some were not subsidized, i.e. juice was running, and compounding during my 3 years of law school.  For all intents and purposes we will assume I was fortunate enough not to have debt associated with my undergraduate degree.
  • Well, those loans where interest was compounding on my student loan, are obviously higher than those that didn’t charge me interest during those 3 years.

Problems and Benefits Associated with Sallie Mae’s New Student Loan Product

The benefits are obvious! Your pay back period and the amount you will have to payback are going to be CUT dramatically.  WSJ gives us some facts:

By requiring students to pay at least the interest while enrolled, the total amount paid over the term of the loan could be about 40% less expensive on average, says Jack Hewes, Sallie Mae’s chief lending officer. The company also shortened the loan terms, offering repayment terms ranging from five to 15 years, compared with 15 to 30 years previously.

That is HUGE!  Another benefit happens inside Sallie Mae – with current income they can package these bad boys up and sell them to fixed income junkies.

The problem with Sallie Mae’s New Student Loan Program should be also fairly obvious.  These 18 year olds will now have a bill to pay.  If it is a $10K loan, at 10% (doing napkin math) then that student will owe $1,000/yr or a little under a hundred bucks a month.  I don’t think it will be hard for a student to come up with the money to pay the student loan debt, but rather, I think it will be difficult for the student to remember, thus ruining his credit even more than those stupid credit card companies giving T-Shirts away to get new accounts.

What do you think of this new student loan product?

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