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Loan plan worries students

Sallie Mae’s new change requires borrowers to make interest payments while in school

Posted: April 2, 2009 1:05 a.m.
Updated: April 2, 2009 4:55 a.m.
Loan Specialist Donna Henderson assists senior business major, Sarah Rodriquez, at the Financial Aid offices at The Master’s College Wednesday afternoon. Loan Specialist Donna Henderson assists senior business major, Sarah Rodriquez, at the Financial Aid offices at The Master’s College Wednesday afternoon.
Loan Specialist Donna Henderson assists senior business major, Sarah Rodriquez, at the Financial Aid offices at The Master’s College Wednesday afternoon.

With a wife, two kids and part-time job, local seminary student Chris Esparza can’t imagine having to pay the interest on his private student loan while still attending school.

“We’re already living hand to mouth. We’re in a crunch,” said Esparza, of Canyon Country, while reading on The Master’s College Campus on Wednesday. “The loan basically fills in the gap that the employment doesn’t. We live pretty frugal.”
Esparza, a student of The Master’s Seminary, is counting on the six months he has post-seminary to find a full-time job and start loan repayments.

He and two other students were surprised to hear that the nation’s largest private student-loan lender, the Student Loan Marketing Association, known to students as “Sallie Mae,” recently replaced its signature loan with a shorter-term version - available for 2009-2010 calendar year — that requires students to make interest payments while in school.

The upside is that the cost of a private student loan will be cut by about 40 percent, said Jack Hewes, chief lending officer for Virginia-based Sallie Mae.  

Repayment would take between five and 15 years, instead of 15 to 30 years.

Sallie Mae says the bills upon graduation wouldn’t rise dramatically because the interest payments students make while in school would avoid negative amortization, where the loan balance grows because of deferred interest.

Current Sallie Mae borrower Matthew Lazor said that “upside” would not have enticed him enough to take out a Sallie Mae loan if it meant having to pay interest while still in school.

“I would have gone on to (other lenders),” said Lazor, a student of The Master’s College. “I don’t really have time to work while in school. I’m taking 22 credits.”

Samantha Steves, another student at The Master’s College, said when her lender changed its terms to require in-school interest payments, she had to switch to another lender.

She needs every dollar while in school to pay for living expenses, insurance, cell-phone bills and more, she said.

“I’d be pretty confident in saying nobody is going to do that,” she said.  

Sallie Mae is one of several private lenders students at College of the Canyons can choose to use.

The college’s Director of Financial Aid, Tom Bilbruck, said while private lending isn’t a widespread means of borrowing for community-college students, Sallie Mae’s new loan structure could appeal to fewer students.

“Students are really struggling and every penny counts and if they can defer till they go into repayment, they’re taking that option,” Bilbruck said.

A student who wants to borrow $17,000 from Sallie Mae over two years would pay $40 a month for the first semester of his or her freshman year.

That figure would rise each semester, reaching $160 by the second semester of the student’s sophomore year, to be paid monthly until graduation.

Once out of school, the student would owe the principle of $17,000. For Sallie Mae, the impetus for the change is easy to see.

Interest payments from students while they’re in school improves cash flow for the company, noted Mark Kantrowitz, publisher of, which tracks the college financial-aid industry.

Since borrowers are made to pay interest while still in school, the lender gets a very early warning if the borrower has financial difficulty and can decide whether to provide subsequent loans, he said.

Sallie Mae expects its default rate will drop substantially as a result of the change, Hewes said. In the last fiscal quarter, 4.5 percent of the company’s private student loans defaulted.

“I appreciate that lenders are needing to take care of themselves and do what they need to do to stay in business with school loans,” said Donna Henderson, loan specialist with The Master’s College financial-aid office.

 “So I think Sallie Mae is backing up on wanting to take loans and just being very careful about who they do business with.”

But while she sees the benefit for the lender, a scary problem for students could result if others decide to follow in Sallie Mae’s foot steps, Henderson said.

Thirty-two percent of Master’s students who borrowed privately borrowed from Sallie Mae this school year, she said.

“If Sallie Mae is tightening up and the others follow suit, having private loans becomes less and less attractive and harder and harder to get,” Henderson said.

“What students have money to pay while in school? They need all that (loan) money because they don’t have money.”  

According to’s Kantrowitz, that type of trend would not be too far-fetched.

“What will happen is lenders will be watching what happens with the Sallie Mae loans,” Kantrowitz said.

“If Sallie Mae is able to break the log jam with this new loan, that, more than anything, will have other lenders looking to switch.”

The Associated Press contributed to this report.



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