Federal education loans are student’s best option
Published: October 27, 2009
WASHINGTON Ican't stand debt. One of my missions in life is to help keep people out of debt.
So I take it as good news that private student loans are declining fast. According to a new report from the College Board, the amount of nonfederal education loans in 2008-09 dropped by nearly 50 percent from the previous year and fell to 13 percent of the market from 25 percent a year earlier.
SLM Corp., commonly known as Sallie Mae, recently reported a significant drop in its private lending. In its third-quarter report, Sallie Mae, the nation's largest student-loan lender, said it had originated $893 million in private education loans, a decrease from $2.1 billion for the same quarter a year ago.
The reason for this trend is obvi ous. The recession has broken a long-standing trend toward private loans, which generally carry higher interest rates than federally subsidized or unsubsidized loans.
Additionally, borrowers don't get the same protections or perks. For example, the government pays the interest on subsidized Stafford and Perkins loans while a student is in school.
Subsidized Stafford loans are awarded to students who have demonstrated financial need. Unsubsidized loans are awarded regardless of financial need and students are responsible for the interest, although they don't have to make payments while in school.
Clearly of the two types of loans, subsidized is better because with an unsubsidized loan, unpaid interest that accrued during the in-school period and the six-month grace period after leaving school is added to the loan principal.
"Students should always borrow federal first, as federal loans are cheaper," said Mark Kantrowitz, publisher of FinAid.org and FastWeb.com.
The interest rate on federally subsidized Stafford loans was 6 percent in 2008-09. The rate dropped to 5.6 percent in 2009-10 and is scheduled to decline to 3.4 percent in 2011-12. The interest rate on unsubsidized Stafford loans is fixed at 6.8 percent.
Kantrowitz also points out that federal loans have better consumer protections, such as economic hardship deferment, greater availability of forbearances and flexible repayment programs.
Interest rates for private student loans currently range from about 9.5 percent to 10 percent, down about 1 percentage point from the previous year, says Tim Ranzetta, president of Student Lending Analytics.
And these rates aren't fixed.
Is shifting borrowing from private student loans to federal good for students and their parents?
It certainly got a lot of thumbs up.
"Absolutely, it's great that private loan borrowing is down, but with one caveat," Ranzetta said. "Is this going to lead to overborrowing with federal loans?"
No doubt it will.
"We are very concerned some students are borrowing much too much," said Sandy Baum, senior policy analyst at the College Board.
But Baum was quick to point out that the percentage of students borrowing incredibly high levels of debt is still relatively low.
Sixty-five percent of 2007-08 bachelor's degree recipients graduated with education debt, and the median debt for those who borrowed was $20,000, the College Board reported.
Michelle Singletary welcomes comments and column ideas but cannot offer specific personal financial advice. Readers can write to her c/o The Washington Post, 1150 15th St. NW, Washington, DC 20071, or e-mail her at
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