In another sign the private loan industry is looking to tidy its tarnished reputation, the nation's largest private education lender, Sallie Mae, has introduced its first ever fixed-rate student loan.
Variable interest rates are one of the most common arguments made against private student lenders, as they can jump as many as 5 points over the loan's lifetime and rapidly drag students in over their heads.
Federal loans, on the other hand, cap their interest rates at 3.4 percent for new subsidized loans and about 6.8 percent for unsubsidized loans – but lawmakers are battling over whether to double the subsidized rate this summer.
If they do, that would make offers like Sallie Mae's far more attractive to cash-strapped undergrads, as the lender's 5.75 percent fixed-interest would strike anyone loan-shopping as the better bargain. The last thing we need is more students weighing themselves down with private loan debt, especially as they don't feature the same protections and repayment options as federal loans.
And because it's still nearly impossible to discharge student loan debt in bankruptcy, flexible terms are just about the only form of security students may have if they hit a rough patch. Not to mention the fact that we're already facing a $1 trillion student debt bubble.
As with any loan, the borrower's existing credit history will factor into the final interest rate, and Sallie Mae's fixed-rate loans can reach as high as 12.875 percent. Sallie Mae's variable interest options will remain available, ranging from 2.25 to 10.125 percent.
Private loans are often used the fill the gap after students have exhausted other loan options and scholarships. However, private lenders and for-profit universities have been under fire for pushing students to borrow far more than necessary.