Sallie Mae splits into two companies. Why should we all be worried?
On May 29, 2013 it was announced that student loan servicing giant Sallie Mae would be splitting into two separate companies – one to service existing loans, and one to lend money as a private student loan lender.
If you owe money for student loans, you probably know Sallie Mae fairly well. They service many federal as well as private student loans, and used to act as a federal student loan lender before 2010.
The difference this time is that Sallie Mae is getting into one of the most profitable loan markets, taking advantage of their industry strength to pummel student loan borrowers.
The Two New Sallie Mae Entities
One company, the education-loan management business, will continue to handle the $118.1 billion in federal loans and $31.6 billion of old private loans in the company’s book of business.
The other company will make student loans that are not federally-funded, guaranteed or controlled. In other words, the most profitable type of student loans – those not subject to federal regulations or interest rate caps.
Why Private Student Loans Are Great For Lenders
Over the past decade, the cost of attending a four-year undergraduate college have risen 41 percent. The average net tuition at a four-year private not-for-profit university rose to $13,880 in the 2012-13 school year from $13,150 a decade earlier. Room and board went to $10,460, up from $8,660.
For the 2012-13 school year, the limit for federal student loans was $5,500 for Freshmen, $6,500 for sophomores, and $7,500 for Juniors and Seniors.
That means an undergraduate student who needs student loans to pay for his or her entire cost of attendance is going to need $18,110 in non-governmental loans for the first year alone.
That’s where the private student loan comes in.
The Profit Behind The Loan
According to Chase, a large private student loan lender, the average interest rate it charges for these loans as of May 2013 is between 3.33% – 9.23%.
These loans accrue interest from the moment of disbursement, which means that a loan of $18,110 taken out in Freshman year at an interest rate of 3.33% (the low end of the spectrum) will have a balance of $20,645 by the time you graduate (assuming you’re on the four-year plan).
A Toe In Roiling Waters
More than half of outstanding student loans are in deferment, according to a report issued by TransUnion.
13.4 percent of student loans that are not in deferment are currently in default.
Outstanding total student loan debt is more than $1 trillion.
But with nowhere to turn, new students are forced to look to an ever-increasing private student loan market.
For Sallie, Nothing But Net
You’ve got a captive audience – students fed the lie that the only road to prosperity is a post-high school education.
Those student have no federal protection from private lenders. Many turn to co-signers to help get loans, obligating the last generation for the debts of the next.
There’s nothing but money in the pot for Sallie Mae and other private student loan lenders.
And not much upside for student loan borrowers unless consumer protection laws are changed to help manage the private student loan debt.
Image courtesy of Wikipedia
Learn Your Student Loan Rights (FREE)
Enter your email address to get my free 6-part Student Loan Roadmap delivered to you by email.