2009 SLA Private Loan Series: Borrower Benefits

Borrower benefits provide opportunities for borrowers to reduce the cost of their loan.  These benefits for private student loans generally fall into one of three categories:

• Interest rate reductions for students who sign up to have funds transferred from their bank account to cover their monthly student loan payment. 
  
  • Citibank, Chase, Discover, PNC, Sallie Mae, SunTrust and Wells Fargo all offer a 0.25% interest rate reduction for auto-debit.  U.S. Bank offers a benefit of 0.50%.  Borrowers can contact the lender to sign up for this program or typically can complete a form that accompanies the account statement.  Why sign up for the program?
    • Saves money.  A 0.25% interest rate reduction on a $10,000 loan with interest rate of 10% could yields close to $1,000 in savings over a 20 year repayment period
    • Setting up your account for automatic payments eliminates the potential for late payment fees, which can be quite significant.  
      • In case you were wondering how significant, Sallie Mae reported late fees and forbearance fee income of $143 million in 2008 (page 37 of 2008 10-K). 

• Reduction in loan principal or interest rate tied to graduation
  • This benefit is offered by Discover (2% principal reduction), SunTrust ($300 principal reduction) and Wells Fargo (0.5% interest rate reduction)
  • Borrowers typically are required to provide some evidence of graduation in order to earn this benefit despite the fact the National Student Clearinghouse can provide degree verification.  Be sure to contact your lender prior to graduation to determine what steps you need to take to earn this benefit. 

• In order to provide borrowers with incentives to receive electronic statements (and move away from paper-based statements), Sallie Mae offers a 0.25% interest rate reduction for borrowers who agree to receive all communications electronically. 

These borrower benefits figure prominently in marketing of private student loans:

• Wells Fargo:  "Offering you a 0.75% combined savings¹ on your interest rate is our way of congratulating you for your hard work while helping you get started on your life after college."
• Discover:  "2% Graduation Reward based on your outstanding principal balance."

Despite their importance to the lender's marketing message, one place they do not appear is the promissory note, which often leads to some skepticism about the permanence of these benefits.  However, for those lenders who do consider taking away such benefits from borrowers who were promised them, there is the cautionary tale of T.H.E./Northstar who had a class action suit brought against them last year for allegedly reneging on a borrower benefit.