A newly expanded, government-subsidized program is coming to the aid of the college graduates who have substantial student loans. You can cut your monthly loan payments by 50 percent, and perhaps more, by refinancing your loans and stretching them out over a longer period of time.
This program, called Options, is being run by the Student Loan Marketing Association, or Sallie Mae, a quasi-governmental corporation that raises money on the public market and uses it to help support student loans. The refinancing program has been available since 1981 on a low-volume, experimental basis. Sallie Mae is ready to invite mass participation, through advertisements in major publications and in college newspapers and alumni magazines.
To see if you qualify for the Sallie Mae Options program, add up all the money still outstanding in all of your government-subsidized student loans: the guaranteed student loans offered by banks and other lending institutions; the national direct student loans arranged by schools and colleges, and the federally insured student loans made directly through federal or state agencies.
You'll be allowed to refinance if your combined loans exceed $7,500, or if they exceed $5,000 and were made through more than one student-loan lender, and if your direct student loans carry interest rates of 3 to 5 percent. Most guaranteed loans are at 7 percent, with a few at 9 percent. Under a Sallie Mae Option, you can repackage some or all of this indebtedness into a single 7 percent loan and stretch it over as much as 20 years on the biggest loans.
This program is available to everyone, regardless of income. A student who graduates this spring can refinance before he or she makes a single payment. Former students who have been paying off their loans can refinance as long as their remaining personal indebtedness exceeds the $5,000 or $7,500 thresholds. (You cannot, however, combine your own loans with those of a spouse or with those made to your parents.)
To arrange a Sallie Mae option, write to the Student Loan Marketing Association, Loan Consolidation Center, Suite 600, 1050 Thomas Jefferson St. NW, Washington, D.C. 20007. Information would also be available at your college student-aid office. Refinancing can be arranged by mail.
When choosing a Sallie Mae Option, you are invited to page through a booklet looking for a loan payment you can afford. You can arrange for fixed payments over the term of the loan, or for step payments that start low and rise every two years. A $9,000 loan, for example, can be refinanced over 18 different time periods, ranging from five years at $178 a month to 13 years at $63 a month for the first two years, rising to $141 a month toward the end of the loan. There are no origination fees or supplementary charges. You pay just the government-subsidized 7 percent interest rate.
Sallie Mae Options should be helpful to people on tight budgets. Borrowers pay more interest over the life of the loan by stretching out their debt but the monthly payments are easier to handle.
As presently structured, Sallie Mae provides a windfall to a small but growing number of students. Since January 1981, new borrowers in the student-loan program have had to pay 9 percent for their loans. Sallie Mae lets them refinance at the lower rate of 7 percent. Edward A. Fox, president of the Student Loan Marketing Association, says that he supports an amendment to the law that set up the refinancing program, to charge 9 percent interest to students who originally borrowed at that rate.
Fox points out that the goverment will save money in the 3-to-5 percent loans that are raised to 7 percent; also, refinancing should prevent some defaults. But overall, Sallie Mae's expanded options program undermines the government's battle of the budget. By turning 10-year loans into 20-year loans, the program increases the length of time the federal goverment has to pay interest-rate subsidies on these cheap loans, and adds to the program's total cost.
Ironically, the federal goverment is trying to save money on student loans by cutting new applicants out of the program. Yet at the same time, it is committing even more financial aid to people who got student loans in the past. It's yet another case of "them that has, gits."