Sallie Mae Competes with Feds for Fixed-Rate Student Loan

SLM Corp., the student lender known as Sallie Mae, plans to offer its first fixed-rate private loans this month to compete with government-backed loans, which have more protection for borrowers.

Interest rates on the loans will range from 5.8 percent to 12.9 percent, depending on credit history and underwriting standards, Newark, Delaware-based SLM said today in a statement. The rate on the government’s Stafford unsubsidized student loan, which is set by Congress, is 6.8 percent.

Outstanding education debt in the U.S. has reached about $1 trillion, according to the federal Consumer Financial Protection Bureau. Sallie Mae, which had a private student-loan portfolio of $37 billion in the first quarter, is seeking to boost originations after federal legislation stopped private companies from issuing government-guaranteed loans as of July 2010.

“For some families that have concerns about how rates may change over time, it answers a need,” Charlie Rocha, senior vice president for student lending at SLM, said in an interview about the fixed-rate product.

Private loans don’t offer the same kinds of safeguards as federally backed loans, such as payments that are based on income levels and deferment options. Unlike credit-card and other types of private-issued debt, private student-loan debt cannot be discharged in bankruptcy.

The CFPB is looking into the private student-loan market and has begun accepting complaints about providers.

Parent Cosigners

SLM expects to write $3.2 billion in private loans this year, according to an April 18 statement. Originations in the first quarter rose to $1.2 billion from $940 million a year earlier. The company’s new fixed-rate loans cannot be taken out in a parent’s name.

Eighty-eight percent of students who took out private loans from Sallie Mae in the first quarter had a parent or other adult as a cosigner, according to the company.

Most private student loans offer variable rates. Sallie Mae’s range from 2.3 percent to 10.1 percent and are set to the London interbank offered rate, or Libor, the company said.

The government-backed parent loan, called PLUS, offers a fixed interest rate of 7.9 percent.

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