Sallie Mae cuts interest rates on student loans

NEW YORK - Sallie Mae is lowering the interest rates it charges on its student loans. But the price cut likely won't attract a surge of new borrowers.

Formally known as SLM Corp., Sallie Mae offers education loans with variable interest rates that tend to be higher than the rates on federal government student loans. Most federal loans come with a fixed rate of 6.8 percent.

As a result, private student loans are widely regarded as a last resort in paying for college, after scholarships, grants and federal loans have been exhausted.

A Sallie Mae executive, Charlie Rocha, notes that private loans can nevertheless help bridge the gap after families max out federal student loans limits.

The new cap on Sallie Mae's rate will be 9.875 percent plus LIBOR, which is the interest rate that banks charge each other for loans. The new lowest available rate will be LIBOR plus 2 percent, which reflects a half percent rate reduction.

It's worth noting that benchmark interest rates, such as LIBOR, are at historic lows, meaning the interest rates tied to them are poised to rise incrementally.

"The impact is not going to felt in one fell swoop," said Greg McBride, an analyst with Bankrate.com. But he said costs could rise significantly for borrowers over the next several years.

The exact interest rate Sallie Mae assigns loans varies depending on the borrower's credit score and the type of repayment option selected.

Students who choose to pay interest charges on the loan while they're in school are given more favorable rates. Sallie Mae encourages this option because it minimizes the impact of compound interest and lowers the cost of the loan over the long term.

Students can also opt to make $25 monthly payments while they're in school to defray interest costs or defer payments altogether until after graduation. The deferment option comes with the highest interest rates.

Sallie Mae is throwing in another sweetener for borrowers. For loans disbursed between July 1 and Oct. 1, loans will come with free tuition insurance for one year.

The insurance covers up to $5,000 in tuition, room, board and other fees if a student is forced to withdraw because of medical reasons.

For many families, however, the perk may not outweigh the safeguards that come with federal student loans.

For example, federal student loans come with guidelines that allow borrowers to defer payments if they can't find work after graduation. Interest continues accruing, but the loan remains in good standing.

With private loans, lenders usually decide whether to grant deferment on a case-by-case basis. The period of relief is also generally much shorter too.