A recent Washington Post article on private student loans on Friday, November 28th stated the following about private loan interest rates:
"Sallie Mae, the nation's largest lending company, has offered private loans with an average interest rate of 11 to 13 percent, nearly twice as much as federal loans, according to Student Lending Analytics, a California-based firm that advises financial aid offices. It said Sallie Mae, which is based in Reston and controlled 42.5 percent of the private student loan market last year, has offered some private loan variable rates that are more than 17 percent.
Tom Joyce, a spokesman for Sallie Mae, said the average rate now is between 10 and 11 percent, around what most banks are charging for private student loans, which are not subsidized and government-guaranteed like federal loans."
I wanted to explain how I arrived at the 11-13% figures quoted in the article which also appear in this post "What Is the Average Interest Rate on a Private Student Loan Today?"
- FBR Capital Markets, an investment bank, in a research note on September 30th, indicated "we expect SLM has increased pricing on recent originations to LIBOR + 9.80% while tightening underwriting criteria."
- 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%. Previously, Sallie Mae's range of interest rates on their loans had been LIBOR + 3.25% to LIBOR + 10.75%, so this represented a .75% increase on low end and 3.25% increase on higher-risk loans.
With Sallie Mae using a LIBOR index of 3.375% for loans in November, I figured a conservative upside estimate for that month would be 13% (LIBOR + 9.8% + 3.375%) with the expectation that it would drop in December. I thought that this was conservative since the credit markets had worsened significantly since the research report in September.
The new LIBOR index that Sallie Mae has posted on their site (effective as of November 25, 2008) is 1.50%. Today, we have a bit more clarity as Jack Remondi, SLM Vice-Chair and CFO stated that the "average spread on private credit loan we are making today is about LIBOR + 10%." This would seem to indicate that the average interest rate on Sallie Mae student loans for December will be at least 11.5%, having been over 13% in November. While APRs (annual percentage rates) are often lower for student loans than stated interest rates, since interest is typically only capitalized once at repayment, that effect would be offset by loan fees for Sallie Mae Signature loans (which range from 0-6%).
Two other observations:
- It would be nice to see more lenders provide transparency on their private student loan rates and indicate their average loan rates on a monthly basis.
- Sallie Mae should immediately discontinue using the Bankrate.com Private Student Loan National Index in their Education Investment Planner which they recently launched. Their EIP site uses this index, which is currently at 8.31%, to calculate monthly loan repayments for private loans. Regardless of whose numbers you believe from the WAPO story, this index significantly understates the cost on the average private student loan.
- Using lower figures creates the dangerous perception that students/parents can afford more private loans than they really can.
- When you consider that interest rates are at historic lows, the average interest rate over the term of the private loan is likely to be at least 200-300 bp (2% - 3%) higher than the current intial rates. Over the last fifteen years, one and three month LIBOR have averaged just over 4% compared to the 1.5% LIBOR index that Sallie Mae is using as their index after November 25th.
- This 8.31% figure is also deceptive as it may appear to make private loans more attractive than PLUS loans, which are priced at FFELP institutions at an 8.5% interest rate. Yes, private loans are variable rate loans, but many borrowers just focus on the initial rate as a point of comparison.