Mailbag: Getting low interest student loans and avoiding private loans

Michael Lux Blog, Mailbag, Student Loans 0 Comments

Yesterday we received an email from a reader curious about getting a lower interest rate on a Sallie Mae loan that she was just approved for.  She asks:

I just applied to Sallie Mae for an initial graduate student loan – variable interest rate. Their website states they offer variable rates from about 3% to 9 %. When they approved my application, they offered me a 6.8% variable rate. I called customer service and asked if there was anything I could do to be offered a lower interest rate. The rep just keep repeating that the rate is computer generated and there was no one else I could speak with to discuss the possibility of a lower rate. My question for you is whether you have any advice for seeking a lower initial variable rate on this proposed loan. Is there a specific department I should ask to speak with? Or is it hopeless?

There are really two answers to this question.  One addresses the issue of getting a lower interest rate on a new student loan; the other is advice on why this readers proposed course of action is a terrible idea… even if she can qualify for a lower interest rate.

Getting a lower interest rate on a new loan

The information that the customer service representative provided is likely accurate.  Approving loans and setting interest rates by computers is how the vast majority of loans are issued these days.  This applies not only to student loans, but to mortgages, car loans, and other forms of consumer debt.

The information that Sallie Mae gave is what it is, and it isn’t going to change.  That being said, 6.8% seems on the high end of things, so it is definitely worth shopping around.  The best bet is to try a number of different lenders to find the lower interest rate (with a huge exception that will be discussed in a little bit).

Many borrowers fear applying at too many places because all of the credit inquiries will hurt their credit score.  What these borrowers fail to realize is that multiple inquiries in a short period of time is treated as shopping around, and essentially just counts as one credit pull.  Thus, there is no downside, other than spending a few extra minutes, to shopping around.

If you are really eager to negotiate with Sallie Mae, the only way that you might be able to get a lower rate is by calling will a loan approval in hand from another lender.  If you can find a lender offering 5%, you might want to call and see if they are willing to match.  Odds are this will be a waste of your time, but it is definitely the best argument for getting a lower rate than what you were initially approved for.

Important Lesson: Avoid Private Loans!!

The above answer only really matters for people who cannot get federal student loans.  Undergraduate students are limited in the amount they are able to borrow each year.  As a result, many turn to private loans to fill the gap.

However, this particular reader is applying to graduate school.  There is no limit on federal loan borrowing for graduate school.  Therefore, any grad student should be looking exclusively at federal loans.  Not only do they have much better perks, but the interest rate on a graduate plus loan is 5.84% next year.  It is a much better loan for less interest.

What makes federal loans so much better?

In short, they are better because borrowers are less likely to find themselves in a student loan nightmare situation because of federal loans.  Think of federal loans as loans with an insurance policy.  If you end up underemployed or unemployed, your monthly payments will be based upon your income, not your total debt.  Payments could be zero dollars per month if you are really struggling.  Federal loans also come with student loan forgiveness programs that are unmatched in the private sector.

The only shortcoming with federal loans is that there interest rate can, at times, be higher than the private loans.  For any student, the higher interest rate is worth the cost because of all of the added perks.  If someone graduates, and decides they don’t need the perks, they can always refinance their loan with a number of different student loan consolidation companies.

The best advice

This borrower, or any graduate student, should opt for a federal loan over a private loan.  If federal loans are not an option, shopping around is far better than trying to negotiate a lower rate.