What Is the Average Interest Rate on a Private Student Loan Today?

Update (9/18/2009):  For an updated answer to this question, visit this new post. 

Update (4/26/09):  For an SLA analysis of the interest rates on top 6 private lenders from April 2009, review this post, "Shopping for student loans makes a difference"

Also check out SLA's Private Student Loan Ratings, the only independent, objective service that rates lenders based on expected loan costs.

I hear this question a lot these days, so I thought that I would take a shot at answering it (I apologize in advance for the length of my response). 

Here is what we know, based on recent information disclosed by the top three student lenders, based on market share estimates from SLA:

• Sallie Mae (over 40% market share in 2007-08 based on SLA estimates)
  
  • FBR, in a research note on September 30th, indicated that Sallie Mae had increased pricing on new originations to LIBOR + 9.8%
  • On October 27th, Sallie Mae updated their website to reflect a new range of interest rates on their private loans:  LIBOR + 4% to LIBOR + 14%
  • Fees ranging from 0-6%
• Citibank (11% market share in 2007-08, based on SLA estimates)
  • Adjusted private loan pricing effective November 17th 
  • New interest rate range:  Prime + 1% to Prime + 7.5% 
  • Origination fees from 0-6%
• Chase (7% market share in 2007-08, based on SLA estimates)
  
  • Adjusted private loan pricing effective November 15, 2008 
  • New interest rate range:  Prime + 2% to Prime + 10.5%
  • No origination fees
    • A limited number of borrowers will not qualify for this offer and may be approved with an origination fee

So, here is a table that shows current minimum and maximums:

		Index
Product	Range	(Prime/LIBOR)	Min.	Max.
Sallie Mae Signature	LIBOR + 4% to LIBOR + 14%	3.38%	7.38%	17.38%
Citibank CitiAssist	Prime + 1% to Prime + 7.5%	5.00%	6.00%	12.50%
Chase Select	Prime + 2% to Prime + 10.5%	5.00%	7.00%	15.50%

Wondering, where the student loan markets were a year ago?  In a March 2007 securitization prospectus (page 104 of PDF), Sallie Mae indicated that their weighted average annual interest rate was 10.79% on their private loan portfolio.  With Prime rate at 8.0% at the time, the weighted average spread was about Prime + 2.79%.

So, where do we stand today?  With securitization markets slammed shut, we unfortunately do not have data from recent prospectus filings to guide us.  With their overwhelming market share, Sallie Mae should be seen as a price leader in the student loan marketplace.  In other words, Sallie Mae sets the price and other lenders follow (they may decide not to of course).  It should surprise no one that Sallie Mae announced their price changes in late October and others followed in November.  This becomes a costly situation when the market leader, whose unsecured debt is rated just one notch above non-investment grade by the ratings agency, has a high cost of acquiring new capital. 

Given the capital constraints that lenders are facing and concerns over consumer credit delinquencies, there appears to be little incentive or appetite to drive market share gains in this market.  This is evident in looking at recent public filings, which indicate Sallie Mae saw their private loan volumes decline on a year over year basis by 24%.   Besides, given the lack of transparency in private student loans, none of the lenders can come out and make a substantive claim that "we offer the lowest interest rates or A.P.R.s," further reducing the incentive to offer interest rates significantly below the market average.  Instead, most seem to be vying for a shrinking their pool of potential borrowers with high credit scores, as they continue to ratchet up their underwriting standards. 

OK, now back to the rates.  We know in late September, Sallie Mae had indicated their average originations were LIBOR + 9.8%.  With a LIBOR index of 3.375%, the average interest rate would be 13.175%.  The LIBOR index used by Sallie Mae will be reset at levels about 100bp lower in December as LIBOR has drifted down.  Assume that the estimated 100bp reduction in the LIBOR index used by Sallie Mae for December was absorbed by the additional breakdown in the credit markets since late September.  This would keep their average rate around 13%.  Taking into account the ranges of interest rates provided by the other lenders (see table above), I would estimate that the average interest rate paid be student borrowers today would be in the 11%-13% range.  That may not seem too different from the 10.79% that Sallie Mae indicated in their 2007 securitization prospectus, but indices (Prime and LIBOR) are down 300-400 bp in that time period. 

Remember that these loans adjust over their life as their index (Prime or LIBOR) changes.  With the Fed having pushed interest rates down 400 bp in the past year (there is only 100 bp left to go to get to 0% discount rate), these loans will have average rates over their term significantly higher.  That is another reason why private student loans should only be used as a LAST RESORT, after all federal grant and loan options (Stafford, PLUS) have been exhausted first.

Please feel free to share any of your experiences with private loan pricing in the Comments field below. 

Comments

[Jason Pall]

All the information you present above is fairly easy to obtain. What I am interested in is the actual borrower characteristics that correspond with these rates. Does someone with a 720 credit score and a full time job get a 0% or 6% fee, or somewhere in between?