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3 lenders offer discounts on student loans

With the student loan industry under scrutiny, at least three lenders are sweetening their discounts on loans, potentially cutting costs for millions of students.

The lenders — Sallie Mae, Nelnet and College Loan Corp. — say they’ve decided to make their loans more enticing because of fierce competition in the industry. Yet the discounts come just as regulators are questioning whether students and alumni have been paying higher loan rates because of cozy deals in which some colleges received cash and trips to steer students to certain lenders.

“As the public turns its eye to the student loan market, the lenders are trying to appear competitive,” says Luke Swarthout, a consumer advocate at the U.S. Public Interest Research Group.

Concerned that lenders have been increasingly profiting as students fall deeper in debt, Congress has also been weighing whether to cut its subsidies for federally guaranteed loans. Lenders are now likely sweetening discounts “to try to stave off the (subsidy) cuts,” says Mark Kantrowitz of FinAid, a financial aid Web site. “They’re making the argument, ‘We’re doing more now, so do you really want to risk’ ” those discounts?

Lenders have warned that lower federal subsidies would shrink their profits, weakening their ability to offer discounts. “There’s no doubt that a subsidy cut ... is going to mean higher-cost loans to students,” says Tom Joyce, a spokesman for Sallie Mae.

In the past, Sallie Mae offered a discount of a quarter percentage point on its Stafford federal loans. But in July, it will offer a reduction of a half percentage point on new Stafford loans for students who arrange for automatic payments. And, for the first time, it will offer a discount of a half percentage point for those who take out private loans, which aren’t federally guaranteed. To get the discount, these borrowers, too, would have to enroll in automatic bill payment.

Nelnet will offer a rate cut of 1 full point, starting in July, on new Stafford loans if payments are debited from a bank account, up from a quarter-point discount currently. The discounts might lead more borrowers to debit their payments electronically; only 7 percent to 13 percent of them do so now, Kantrowitz says.

Meanwhile, for loans that are consolidated in 2007, College Loan is offering a 1-point rate cut after 48 consecutive on-time payments; that’s on top of an existing cash rebate of up to 2 percent of principal after nine on-time payments in a row.

More-generous loan terms can help individual lenders gain an edge over rivals at a time when colleges are rethinking their “preferred lender” lists, says Fritz Elmendorf of the Consumer Bankers Association. Kantrowitz says he expects other lenders to follow suit, just as investigators are looking into the lenders’ policies and Congress is considering cutting subsidies.