Feb. 20, 2007

An Open Letter to Student Loan Consumers:

Student loan "borrower benefits" have received much attention in recent weeks. These fee reductions and interest rate cuts can save consumers hundreds of dollars over the life of their guaranteed student loans. Proposed Congressional cuts to the student lending programs in Washington threaten these important savings programs.

With the array of discounts and interest rate reductions offered to guaranteed student loan borrowers today, here is some "straight talk" to help borrowers evaluate the true impact of these benefits.

There are two types of borrower benefits on student loans:

• Up-front Benefits — These are paid when the student first receives the loan. The most common up-front benefits are origination fee subsidies on Stafford loans, which most credible student lenders now offer. By paying the 2% federal government origination fee and the 1% guarantor default fee on the student’s behalf, lenders save students hundreds of dollars when they need it most — while they are in school.
  In fact, students have benefited from more than $1 billion in fees paid by private sector lenders and guarantors this academic year. All student borrowers qualify for these Up-front Benefits.
• Repayment Benefits — These benefits are paid after the loan enters repayment. The most common repayment benefits are lower interest rates and cash rebates. With most lenders, borrowers are rewarded for on-time payments, on-line account management, and automatic withdrawals from their bank account.

While repayment benefits can save borrowers money, it is important to remember that a small percentage of borrowers may ever realize these savings.

What are the most common reasons for losing repayment benefits?

• Consolidation. Approximately 70% of borrowers will pay off their underlying loans by consolidating their loans in their first year of repayment. When a borrower consolidates, they pay off the underlying loan with a new loan. That means the borrower is losing any promised Repayment Benefits on the original loan(s).
• Late payments. Only about 20% of borrowers who do not consolidate make their first 36 monthly payments on time.

The bottom line is that less than 10% of borrowers will earn all the advertised Repayment Benefits as they will either consolidate their loans or miss a scheduled payment sometime during the first several years of repayment.

Given this backdrop, here are some important reminders for student loan consumers.

When selecting your lender:

• Consult with your school’s financial aid office to ensure that you understand the benefits being offered, and that you are working with a reputable lender — a lender you can trust.
• Choose a lender that offers Up-front zero-fee Stafford loans benefits. This is money that you will receive in school, when you most need it, with no strings attached.
• Select lenders that are clear on how to attain and keep any rebates and discounts.
• Beware of websites that claim to provide objective lender comparisons. These comparisons often assume that all borrowers will achieve all Repayment Benefits.
• Perform an honest self evaluation before signing up for "promised" discounts. Are you someone who is likely to make 2, 3 or even 5 years of on-time payments?
• If you consolidate your loans, be sure you understand the rebates and discounts if any that the lender may offer on your new consolidation loan.
• Take advantage of debt management programs, entrance and exit counseling and other resources schools, lenders and guarantors offer to borrowers.

Although they can be complex at times to understand, borrower benefits that reduce costs and encourage good repayment habits are valuable to students and their families. The $1 billion of Up-front Benefits that students received this academic year represent real cash savings when they need it most. We encourage schools and students to call Congress and urge them not to make cuts to student lending programs that will put important money-saving benefits at risk.

Guaranteed student loans are the most consumer-friendly financing products on the market.

The investment in education is likely to pay off handsomely throughout a lifetime. Being a savvy consumer today will save hundreds of dollars during the life of a loan.

Sincerely,

Tim Fitzpatrick