Sallie Mae Drops Rates on Private Student Loans

Sallie Mae announced on Monday that it has dropped its rates on private student loans in order to become more competitive. The company was once an approved lender of federal student loans, but now has to compete in the private market thanks to changes to the student lending process.

Lender Lowers Interest Rates

Sallie Mae announced it would be lowering the interest rate on its private student loans. The lender offers education loans with variable interest rates that are usually higher than rates offered by the federal government.

Until last year, Sallie Mae, among other private lenders, issued federal student loans approved by the government. However, after student loan reform took place, the government decided it would issue its own loans to better manage distribution.

Now that Sallie Mae has been cut out of the equation, it is trying to compete with federal loans that currently come with a fixed rate of 6.8 percent. Sallie Mae’s rates have now been lowered to a cap of 9.875 percent plus LIBOR, which is the interest rate banks charge one another for loans.

Will Students Jump On the Lower Rates?

Private student loans have always been considered a last resort after attempts are made to obtain scholarships, grants and federal student loans. It’s for this reason that some experts believe students won’t run to Sallie Mae’s loans, even though their rates have been discounted.

Another factor that could discourage some borrowers from looking to Sallie Mae’s loans is that the rate is determined by a credit score and is variable. Students will be allowed, however, to lower their interest rate by opting to pay on the interest while still in school.

Sallie Mae knows it is going to have to compete to win borrowers, which is why it is offering free tuition insurance for one year on loans disbursed between July 1 and Oct. 1. The coverage is to be used in the event that a student is forced to withdraw from college for medical or other reasons.

Sallie Mae’s insurance will cover up to $5,000 in tuition, room, board and other fees.