Chase Select Private Student Loan Pricing Increasing by 1%

Here is the announcement:  Download E-Blast, Chase Select Pricing Update, E Schools, 12-18-08

Here are the highlights:

• Interest rate margin for Chase Select will increase by 1% for all new loan applications approved on or after December 20, 2008. 
  
  • On their website, Chase provides a repayment example where the current range for loans is Prime + 2% to Prime to 10.5% and the effective dates are "Effective October 1, 2008 – December 31, 2008."  
    • This information is also available on the SLA Private Loan Options, which has not been updated yet to reflect this change.   
  • The announcement today would seem to bump that range up to Prime + 3% to Prime + 11.5% (actual rates of 7% to 15.5%)
    
    • Chase raised the interest rate margin by 2.5% in mid-November. 
  • Given the sharp cuts in interest rates the Federal Reserve has recently engineered, the Prime Rate index that Chase uses will fall to 4.0% for the first quarter of 2009, a 1% drop from their current levels.
    
    • While this is good news as it negates the increase in margin; it is the margin increase  that really matters over the life of the loan.  The Prime Rate index will drop again in the 2nd quarter for Chase to 3.25% (if no more changes from the Fed) and then the rates will only have one direction to go.  Interest rates are at historic lows as the Fed Funds rate (which drives the Prime Rate) can't go any lower than its current target of 0 to 0.25%.
      • Borrowers should remember as interest rates rise these loans will rise with them. 
      • Think of this as "What the Fed has given (in terms of rate cuts), the lenders are taking away (through higher margin spreads)."

• Underwriting criteria are also being tightened:
  • "Revising Underwriting Criteria"
    Due to the continuing difficult credit environment, we are revising our underwriting guidelines for all private student loan applications approved on or after Dec. 20, 2008. As a result, we anticipate that fewer students will be approved for a private loan individually. To improve the chances for approval, please advise students of the benefits of applying with a qualified cosigner." 
    
    • Sallie Mae indicated  at a recent Goldman Sachs investor conference that they have set a target to have co-signers on 90% of their private loans.  This obviously has a positive effect for lenders of reducing their credit risk.

I must express a little surprise at the timing of this for a few reasons: 

• This is the second rate increase since mid-November, with the net impact being a 3.5% increase in interest rate margin.  I know that the November change was a bit of catch-up as Chase had not changed rates for some time; but the December change seems to indicate funding costs for banks continuing to increase (or the more cynical view might be an opportunity to increase profit margins). 
• The speed of implementation is rapid; notice to schools on December 18th and takes effect as of December 20th. 
  
  • I guess there was some warning in their November announcement:  "As such, we will publish effective interest rates on a more regular basis."  So maybe we should expect these changes on more frequent basis. 

I wonder if the increased interest rate margins on private loans combined with the requirement for co-signers will push more families to consider the PLUS loan option. At a 7.9% - 8.5% fixed interest rate with 4% fees, this federal loan alternative looks more attractive by the day. 

SLA research puts Chase as the #3 private student lender, behind Sallie Mae and Citibank.