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Sallie Mae Makes Changes to Student Loan Program

[May 8, 2010.]


An increasing number of college students are graduating with student loan debt that can run into the high six figures. They may run the risk of defaulting on student loans if they don't earn enough money after graduation. In an attempt to make student loan debt more affordable for college students, Sallie Mae is making some changes to its Smart Option Student Loan.

Paying Loan Interest Sooner

Beginning May 10, student loan rates through the program are going to range from about 2.88% to 10.25%, based on the LIBOR index. The student loan provider is also eliminating disbursement fees. Students begin paying on interest while still in school, which results in graduating with less debt and paying off loans faster, according to Sallie Mae.

“Sallie Mae’s Smart Option Loan is a favorable option for families who need to fill the gap in their college funding,” Scott M. Kahan, certified financial planner practitioner and president of New York-based wealth management firm Financial Asset Management Corp., said in a Sallie Mae statement. “By paying the interest while in school, families can save a lot of money and pay off their debt much sooner. This goes a long way in managing your finances responsibly.”

Reduce Loan Balance Faster

Sallie Mae said that changes to the loan program would allow a freshman who borrows $10,000 to make payments on principal and interest for only seven years after graduating, rather than for 15 years. The student also would save $8,800 by beginning interest payments before graduation, compared with borrowing money through other private loans.

Cash Back to Students

The student loan program also plans to offer 2% back on interest paid while a student is in school. To qualify for the cash back, payments must be made on time. The money can be applied to the loan balance, deposited in a savings account, or withdrawn by check.

Pros and Cons

The loan program definitely has its benefits, and anytime you can pay off a loan sooner than scheduled the better. But it's unlikely many students are going to be able to make interest payments while in school. Most students borrow money for education expenses because they don't have cash available. So they would have to get a job to earn enough to make payments and cover any living expenses.

The other alternative is for parents to chip in for the interest payments while their kids continue their studies. But so many parents already go into huge levels of debt borrowing loans for their kids' education that it might be a stretch for them to cover the interest payments.


About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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