With the rising cost of tuition, many students are considering private loans to cover their college expenses. For students who choose this option, Sallie Mae’s private student loans may now help them cover college costs for less.

On May 16^th, The Washington Post reported that Sallie Mae, a company that offers loans to college students, cut interest rates on its private loans. Sallie Mae’s student loans have variable interest rates that are generally higher than interest rates on federal loans. Most federal loans have a fixed 6.8 percent interest rate. The new upper limit on Sallie Mae’s interest rates will be 9.875 percent plus LIBOR. LIBOR is the loan interest rate that banks charge each other, which is at a historic low. The lower limit for interest rates on Sallie Mae’s loans will now be LIBOR plus 2 percent; a half percent rate reduction. This range exists because the interest rate given to each student depends on their credit score and the type of loan repayment plan that they choose. According to Sallie Mae’s website, students with a creditworthy cosigner, such as a parent, can qualify for lower interest rates as well.

Sallie Mae encourages students to pay interest on loans while they’re in college, and offers favorable interest rates as an incentive. By paying interest while in school, students can reduce the effects of compound interest and lower the long-term cost of the loan. Or, as an alternative to interest payments, students can cut the long-term cost of the loan by making $25 monthly payments while in school. Students who choose to defray interest costs or payments in general until after graduation have to deal with the highest interest rates.

Despite the drop in Sallie Mae’s interest rates, federal loans still offer a better value, as The Washington Post reported. Since federal loans are cheaper, private student loans should be the last resort.  Read The Washington Post’s full article on Sallie Mae’s reduction of college loan interest rates for more information about these private student loans.

So, what does this all mean for you as a student? Well, if you’re a traditional student at a traditional school, such as a recent high school graduate at a state university, and you still haven’t met your financial needs after maxing out your grants, loans, and scholarships, this could be your opportunity cover college costs while saving some money in the long-run. But, non-traditional students at non-traditional schools, such as re-careering adults at for-profit colleges, will need to find other options. As The Wall Street journal reported in a similar article about Sallie Mae’s student loan interest rate cuts on May 16^th, the company stopped lending to these students in 2009 to minimize risk. If you are unsure whether you are eligible, a representative from your college or university’s financial aid office may be able to help.

If you are thinking about getting a private student loan, Sallie Mae shouldn’t be the only lender you consider; be sure to compare and contrast the many different types of lenders and loans available. Consumers Union, a nonprofit publisher of consumer reports, offers a printable worksheet that can
help college students pick the best loans. You will have to find the numbers to plug in on your own, but legitimate lenders should make all of the needed information publicly available.

As mentioned above, having a higher credit score can lower your interest rates, so try to build good credit ahead of time. You can build credit by engaging in responsible behaviors such as opening a checking and savings account, paying utility bills in your name on time, paying the full balance on your credit card every month, and making regular payments your vehicle. Again, as it says on the Sallie Mae website, students with a creditworthy loan cosigner can get lower interest rates, so if you feel comfortable asking a parent for help, and they have acceptable credit, talk to them about this option.

With any loan, it behooves you to borrow the smallest amount possible.  In most scenarios, you can’t just file for bankruptcy to make your student loan debt go away; this is true for both federal and private loans. According to the Department of Education’s Loan Cancellation and Discharge webpage, to use bankruptcy to cancel student loans, you must prove that repayment of your student loan debt would cause “undue hardship” as defined in your jurisdiction. As you can imagine, this is difficult to prove. So, when you take out student loans, remember that you are making a serious commitment to pay back every dollar. Many loans require you to borrow a minimum amount, so use this as a starting point, then calculate how much money you actually need while attending college, not how much you would like to have. By living a frugal lifestyle now, you can save yourself a financial headache after graduation.

In conclusion, if you are eligible for private student loans, your needs haven’t been met by federal aid or scholarships, you are willing to research different types of loans, and you want to accept additional responsibility, now might be the time to take advantage of lower interest rates from Sallie Mae or other private lenders. But, try to build credit ahead of time, borrow as little as you can, make regular payments while still in college, and keep applying for federal aid and scholarships.