Blog readers may recall a post about the same time last year demonstrating the value of shopping around for a private student loan. This project helped dispel the myth that there was little difference in the starting interest rates that the purveyors of private student loans charge borrowers. Interestingly, this post became one the most popular on the SLA Blog last year.
In applying as a cosigner for six private student loans last year, the conditional rates ranged from 7.0% to 12.13% (with a 3% fee). All interest rates quoted in this post are variable rates that will adjust as their underlying index (either Prime Rate or LIBOR) changes. .
So, what to do for an encore this year? How about adding another borrower to the mix with a different credit profile?
Here are the credit profiles for the two cosigners and the school profiles for the students:
Borrower 1 | Borrower 2 | |
FICO score |
700-720 | 790-810 |
Debt:Income ratio |
Low | Low |
School type |
4-year private | 4-year public |
Completion Rate (six year) | 65% to 70% |
70% to 75% |
Default Rate (last 3 years) | 1%-2% | 1%-2% |
Each student and cosigner applied for loans from a combination of national and regional private student loan lenders.
Here are the results for borrower #1:
Lender | Starting Interest Rate |
Addison Avenue FCU | 6.00% |
Citizens Bank | 8.75% |
Wells Fargo | 10.24% |
Citibank | 11.125% + 3% Fee |
Sallie Mae | 12.25% + 3% Fee |
Here are the results for borrower #2:
Lender | Starting Interest Rate |
SunTrust | 4.25% |
Discover | 4.25% |
Wells Fargo | 7.74% |
Sallie Mae | 10.00% + 3% Fee |
Citibank | 10.125% + 3% Fee |
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Caveats:
- Several lenders have made changes to their pricing structures since this study was carried out in late April. For details, go here and here.
- For example, Sallie Mae has eliminated their 3% fee and lowered the minimum and maximum interest rates on their Smart Option loan. If Sallie Mae were to pass along the 200bp decrease in their funding cost (from recent SLM conference call) to their private loan borrowers, their rates would closely approximate Wells Fargo rates in the two example above.
- These results are strictly intended to demonstrate the wide range in starting interest rates on private student loans and not to be interpreted as the interest rates a borrower with a comparable credit profile would be expected to receive from a given lender.
Insights:
- Interest rate ranges for both the good credit (FICO of 700-720) and the excellent credit (FICO of 790-810) varied by roughly 6% with the starting interest rate being between 6% and 12.25% (with 3% fee) for the good credit and 4.25% and 10.125% (with 3% fee) for the excellent credit.
- For those lenders that provided rate quotes for both borrowers, Wells Fargo provided a 250bp benefit for the better credit while Sallie Mae provided a 225bp benefit and Citibank a 100bp benefit.
- In this very limited sample, a credit union (Addison Avenue), a regional bank (SunTrust) and a recent entrant (Discover) provided the most competitive rates.
So, the next time a student asks which lenders have the best interest rates on their private loans, be sure to tell them the virtues of shopping around. Be sure to shop from a diverse group of lenders too, including credit unions, regional banks and the national players (and don't forget about state alternative loan programs, many of which have a fixed interest rate).
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