2009 SLA Private Loan Series: Miss A Payment On Your Private Student Loan, You Could See Your Interest Rate Rise (Updated)

In perusing promissory notes recently, I came across several lenders who increased the margin on their private loan product when a borrower is in default.  As for what constitutes default, all lenders reviewed include among their default triggers, the following condition, "I fail to make any monthly payment to you when due."  Please note that this post is based on analysis of current promissory notes and may not apply to loans originated in previous years. 

So, what adjustments can lenders make to  interest rates when a default occurs?  Let's go to the videotape, I mean, let's go to the 6 point font of these promissory notes, which has convinced me that reading glasses are not that far off:

• PNC:  Loan margins may increase 2% upon default. 

"Upon default, you may also capitalize any interest and fees (i.e., add accrued and unpaid interest and fees to the principal balance), and increase the Margin used to compute the Variable Rate by two percentage points (2%). 

• Chase:  Loan margins may increase 3% upon default.

"If you are in Default under this Agreement, as defined in Section 20 below, to the extent allowed by applicable law we have the right to immediately increase the Margin by 3%."

Note:  For reference the first item listed under Section 20 is "...you are in default if:  (1) you fail to pay any payment when due..."

Update:  As of May 8, 2009 Chase has eliminated this clause from their new promissory note, so they NO longer have the right to increase the Margin by 3%.  Here is the new promissory note:  Download Chase Select New Prom Note_5.8.09.

• SunTrust:  Loan margins may increase 2% upon default

"Upon default, you may increase the Margin used to calculate the Variable Rate by two percentage points (2%)."

OK, I know that I will hear from lenders saying that their current policy is NOT to raise interest rates when a borrower is late with a payment (that's what late payment fees are there for), so borrowers have nothing to worry about.  Hmm..this argument may sound familiar.  Anyone who has seen their credit card's interest rates rise for no apparent reason might be skeptical of such claims.  The only point that I would make is that these lenders CAN RAISE YOUR INTEREST RATE IF YOU ARE LATE WITH ANY PAYMENT.  YES, THEY CAN.