Starting October 27th, the maximum rate on Sallie Mae Signature Loans will climb to LIBOR + 11.25% (the LIBOR index is 3.375%) with the minimum rate set at LIBOR + 4.5% (or 7.875%) according to recent emails from Sallie Mae. Sallie Mae's website, which had not been updated as of this evening listed min./max. rates of LIBOR + 3.25% to LIBOR + 10.75%.
Update on 10/27/08: Sallie Mae's website has been updated as of 10/27/08 to show that the Signature Loan has a minimum interest rate of LIBOR + 4.0% and a maximum of LIBOR + 14% with disbursement fees up to 3% and repayment fees up to 3%. It would appear that the schools who had been notified by Sallie Mae of the pricing changes are receiving preferential rates as their maximums are 2.75% less than those listed on the Sallie Mae website. It is interesting however, that the minimums at these schools are 0.5% higher than the rates on the Sallie Mae website.
So, these changes reflect an increase of 1.25% on the minimum rate and 0.50% on the high end. Adding in origination and repayment fees that can run as high as 6% leads to an A.P.R. (Annual Percentage Rates) north of 16% for the highest priced loans. At an A.P.R. of 16%, the loan you take out as a freshman will have grown to almost twice the original principal (about 1.8X the principal), when you graduate and begin repayments four years later (if you choose to defer payment until then). To provide some additional context, Sallie Mae's interest rate min./max. earlier this year were LIBOR + 2.5% to LIBOR + 8.0% with no fees, so the margin is up 150 and a whopping 600 basis points for the minimum and maximum, respectively (with an increase of up to a potential of 6% in fees too). The difference a credit crunch makes!
Why does this matter?
- Sallie Mae indicated that they would raising their underwriting standards so it will be harder to procure a loan from them (and for those lucky to be approved, they will be paying more). In their conference call last week, SLM indicated that the average FICO score is 733 for loans that they are approving.
- A recent analyst report indicated that Sallie Mae's average private loan was priced at LIBOR + 9.8%. To arrive at this 9.8% figure suggests that roughly 20% of loans would be priced at the LIBOR + 4.5% while 80% would be priced at the highest rate of LIBOR + 11.25%. This is a simplistic calculation but makes clear that more loans will be priced at the maximum rate compared to the minimum.
- This announcement is likely to lead to another round of interest rate increases from other lenders. Harvard's School of Public Health had announced recently that Citibank would be making pricing changes to their private loan program in mid-November which could include daily resetting of prices.