2009 Private Loan Series: Sallie Mae Smart Option Tightens Underwriting Process, Including a Manual Credit Review

Updated (10/18/09):  Sallie Mae's tighter underwriting became apparent in September when management reported that their Smart Option originations were 25% below "modest expectations."

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I recently applied for a Sallie Mae Smart Option loan as a co-signer for my nephew.  Going through this process highlighted several differences in how Sallie Mae is underwriting and processing these loans compared to other private student loan lenders. 

Borrower's Application
First on the application front, there were several unique questions that Sallie Mae asked prospective student borrowers:

• Have you ever defaulted on an education loan?
• Current outstanding student loans for Federal loans
• Current outstanding student loans for Non-Federal/Private loans
• Grade point average

Co-signer Application
For co-signers, Sallie Mae sought additional information about assets held (that other lenders generally ignored):

• Inquired about accounts held by co-signer
  • Checking
  • Savings, CD's, Money Market, Retirement or Investment
• Asked to provide Approximate Home Value

As an added fraud prevention measure, the application also had a co-signer verification process which included four multiple-choice questions which pulled data from deep within a co-signer's credit report.  Given that almost all private student loans now require a co-signer, it certainly makes sense that SLM would want to guard against fraud in this area, since desperate times may lead to desperate measures...

The Credit Decision
Finally, having a completed application for both the borrower and the co-signer, I anxiously hit the ENTER button, waited and then was notified with a message that the Credit Decision was PENDING REVIEW and to check back in 2-3 business days. 

My curiosity led me to call the 1-800 line where a customer service representative told me the following (her paraphrased response below): 

My application had been forwarded to the underwriting team who would be manually reviewing it.  I should have a response in 3-5 business days (Note:  Inconsistent with message on the screen].  For this specific loan, since the student needs to pay interest-only in school they undergo a more rigorous process, which includes manually reviewing the credit agency report.  Sallie Mae wants to make sure that this is the right loan for the student. 

When I asked the representative if this delay was unique, she said "Oh no, most people have to wait.  It is nothing about your application that is leading to the delay."  This was later confirmed again when I placed another call to customer service to check on the status of my loan.  With their defaults rising, Sallie Mae seems to have found religion when it comes to stricter underwriting standards.  It appears that most applications are now undergoing a manual review prior to approval.  Oh, and if you were wondering, I was eventually approved for the Smart Option loan and will provide details later in the week. 

Comments

[P. chadha]

what happened after the approval? what were they actually looking for? i just now had my cosigner sign the application and they said the same exact thing. how long did it actually take for them to give u their decision?

[Kate]

don't even bother with it. it's a waste. i have signed my life away to them. i received 12,750 USD, and not even 6 months later my balance is over 17,000 USD with a variable interest rate currently at 13%

[John]

Just STAY AWAY from Sallie Mae. It is a horrible company with terrible customer service. (I wonder how their employees still didn't get a nervous break down) This company will rip you off and take your money.

[Kelly]

I just applied for the smart option loan for grad school, have great credit and co-signed with my dad, who also has great credit.the interest rate quoted is between 9.75 AND ALMOST 14%!! Anyone else have this issue? I'm wondering if I filled out something wrong. When I did the calculator online, it was more like 8-9 percent for the high with no fees. Now, they say they are charging a 0-5% disbursement fee. When I called twice they said they do not charge this fee anymore, starting in June. I cannot imagine the interest rate could actually be that high. I may as well put this on my credit card.