It had been a while since I updated my original estimate. So given that there has been a lot of activity recently and I have been getting a lot of questions about I thought it was time to take another look at my industry model.
In November of 2008, my estimate was in the 11% to 13% range when LIBOR was at about 3.4%. LIBOR has since fallen 300bp (or 3% since then) which has been counteracted by margin increases from some lenders (here and here and here) leading me to believe that until recently the average rate was in the 10-11% range.
My latest update is based on new information from the recent Sallie Mae investor meeting, which confirmed their rates are still in the LIBOR + 10% range but also indicated a sharp drop in volume, with the 3Q and 4Q volumes expected to be 40% below 2008 levels. So, in my modeling, I am reducing Sallie Mae's market share numbers since I believe their volumes are declining at rates faster than the overall market. Taking this into account as well as current LIBOR rates and margin information on the largest lenders leads to my new estimate that the average interest on a private student loan is 9.5% - 10.0%.
Note that on an APR basis, these figures would be higher since 1/2 of the major lenders are currently charging origination or repayment fees on their loans. Remember that these are variable rate loans tied to LIBOR or Prime Rates. Both indices are at historical lows. Over the past twenty years LIBOR has varied from 0.3% (today's rate) to over 9% while Prime Rate has been in a range of 3.25% (today's rate) to 11.5%. I had CNBC on within the last month and a Fed Governor was on saying something along the lines of "The Fed will move quickly to raise interest rates" when they feel the economy is on sturdier footing. These variable rate loans are spring-loaded to rise.