Students who take out new private loans with the nation's largest education lender will, from now on, have to begin paying them back next semester, according to a press release from Sallie Mae officials. The move will dramatically decrease the total cost of a loan over time, the lender said, but some experts fear it will push private loans-and college itself-out of reach for some students.
The student loan giant will begin requiring interest payments starting this fall. Officials said in the release the move will make the loans less expensive in the long run, but many see the decision as another obstacle in affording higher education.
"Today's students are financially savvy and looking for affordable, responsible options to help with their investment in higher education," said Jack Hewes, senior executive vice president and chief lending officer, in the release. "We have tried to design this loan to be sensitive to the needs of students who not only rely on this financing to get to college, but also want a more manageable level of debt as they transition from school to work. Paying a little while in school guarantees that students will save a lot later."
Mark Kantrowitz, publisher of the financial aid Web site finaid.org, said in a phone interview with iThe Beacon/i that the new policy will ultimately shorten the number of years it will take to make the payments as well as reduce the overall interest.
Kantrowitz also said other lenders will likely find the plan attractive because it will bring in greater cash flow, which will result in more funds to be used as loans.
"This will have a much lower default rate than other loans," he said. "Only students who can afford it will be paying, and it gives an earlier warning to students who encounter financial difficulty."
Jim Sowden, a junior marketing communication major who currently has loans taken out with Sallie Mae, said the new policy will likely cause him to search for lenders elsewhere for the upcoming year.
"It's definitely going to be a burden to meet a monthly payment ... on top of everything else I have to pay," he said. "I had planned on being in a much more lucrative position after I got out of college."
Sowden, who currently works as a paid intern at Street Attack Marketing, said he spends his paycheck on rent and groceries.
"For next year, I had assumed I would go back to Sallie Mae, but I'm definitely gonna weigh this against them and look for other lenders who won't make me pay while I'm in school," he said. "Hopefully, this won't become a trend, but it looks like it might."
The new policy could dramatically reduce the number of years a borrower would spend paying the loans back, Kantrowitz said. Sallie Mae officials said the overall cost of the loans will be cut by 40 percent, and, according to the company's Web site, there will also be a plan available that allows borrowers to make monthly payments based on their income during a time of "partial financial hardship."
"With a traditional student loan, where you defer interest, the interest will continue to accrue and you end up with a much larger payment than when you started," Kantrowitz said. "Because the loan balance [under the updated policy] is smaller at graduation...whereas the long-term [plan] is 15-30 years, this loan will be paid back in five to 15 years."
Kantrowitz said Sallie Mae is the first national lending agency forcing students to make payments while in school a matter of policy, though a handful of private, state loans came up with the idea first. New Jersey, Minnesota, Maine and Connecticut all have had lenders give out loans with similar requirements.
Sophomore Peter Masoero said the plan defeats the purpose of a loan.
"The idea of a loan is that you don't have to pay for it until you get out of college," said the animation and motion media major, who works at the AMC Loews Theatre on Tremont Street to help pay for school. "I already consider myself in debt for life," he said. "Any money I make is just getting me out of the negatives."