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Friday, March 20, 2009

Changes at Sallie Mae

Sallie Mae is restructuring the terms of its student loans and will now require students to pay interest while they are still in school (as opposed to continuing to defer cost until post-graduation). This saves money in the long-run on each loan, and is likely necessary in this economic climate. Nevertheless, it has the bad side-effect of being temporally regressive (ie. taking money from students and their families when they can least afford it - before the student can earn a real income). And of course, this has a bigger negative impact on already poor families compared to rich ones.

I think it has some merit still, for the following reasons:

1. Students have grown lazy - this will act as an incentive for students to seek out internships and part-time jobs. It will bring accountability back into college life.
(Note: this could be debated - it's just as possible that students will turn toward credit card checks with much higher ballooning interest rates to pay off their student loan interest while in school - that would ironically make the lending markets in aggregate worse off).

2. The potential savings on interest gained over the lifetime of the loan is a big plus.

3. This will improve Sallie's cash flow, and if the stimulus regarding education spending offsets some or all of the negative upfront cost to families, the overall impact of Sallie's move and the stimulus could be a huge plus.

9 comments:

Tschäff said...
This comment has been removed by the author.
Tschäff said...

I don't know why we don't demand the government provides interest free loans to pay for college plus a small administrative fee.

There is no good reason it should be privatized, other than it makes a lot of easy money for investors and bankers.

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