Sallie Mae announced plans to revamp its private loan structure on March 23, 2009. No longer will students be able to avoid payments on private loans until after graduation – Sallie Mae wants them to pay a portion of the interest while in school. Sallie Mae says this will save students money in the long run, but critics say that it will make these loans harder to get. Private loans have been the major source of money for students looking to finance their education. Besides lowering the risk the Sallie Mae,  the loans could more easily be sold on the secondary market.

With private student loans, borrowers used to defer making payments until after they graduate. With the new system, in addition to requiring interest payments, Sallie Mae also shortened the loan terms, offering repayment terms ranging from five to 15 years, compared with 15 to 30 years previously. As with any other loan, shortening the terms would have the effect of increasing the loan payment amounts, also making the loans tougher for qualification.

Students who do not qualify for these private loans can still apply for federal loans. Federal loan programs available from Sallie Mae are Stafford Loans, Perkins Loans and Federal Graduate PLUS loans. In addition, Parent PLUS loans were retooled last year to allow parents to wait until their kids had finished school before beginning to repay the loan.

The differences between private and federal loans are basically the total amount which may be borrowed, financial eligibility and interest rates. Federal loans loan limits are often half of what may be borrowed using private loan products. However, the interest rates on federal loans are lower than private loans.   Financial eligibility, often based on what a students parent’s make per year, is the number one reason students do not qualify for federal loans.

Source: Wall Street Journal.

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