Racking up student loans and paying them off for decades will no longer be a reality for students taking loans from the nation’s largest private student lender.
Starting in 2009-10, Sallie Mae will scale back the amount of time students have to pay back loans to five to 15 years, from 15-30 years. The lender also will require students to make interest payments while still in school.
Sallie Mae representatives said although students will have less time to repay loans, paying off some interest while still in school will prevent monthly bills from rising dramatically after graduation.
Telecommunication, information studies and media sophomore Kyle Gee, who has a private loan from Citibank, said he would try to secure loans elsewhere if other private lending companies followed Sallie Mae.
“That’s the reason you’re taking out loans,” he said. “You can pay them back when you’re graduated with a job and have more money.”
During the 2007-08 school year, 3,178 MSU students used private loans, said Val Meyers, an MSU associate director of financial aid. About 26,000 students receive financial aid, but most of them apply for federal loans, she said.
“The private loans are less desirable because the federal loans don’t require you to have credit background if you’re a borrower,” Meyers said. “The interest rate on federal loans is a fixed rate and is set by the government.”
David Schweikhardt, a professor from the Department of Agricultural, Food and Resource Economics, said Sallie Mae may have changed its policy to attract more private investors who supply lenders with funding in the form of bonds.
“Anything you can do to assure those bond buyers that the person borrowing the money is a good credit risk is basically coming into play, given where the credit markets are right now,” Schweikhardt said.
Under the new requirements, if a student was to borrow $17,000 over two years, they would be required to pay $40 per month the first semester. The amount would increase each semester, reaching $160 per month by the end of the second year.
The $160 monthly payment would stay constant until the student graduated, when they would be left to pay the original loan amount of $17,000. Under the previous system, interest would have accumulated while the student was in school and been added to the original loan amount.
“Forty dollars a month is easy to do,” Gee said. “But … it would be a little scary to see how much it could increase.”
The Associated Press contributed to this report.
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