Sallie Mae rolls out parent loans for college tuition

Private lender joins expanding market of alternatives to feds’ Parent Plus aid program

As parents face the prospect of paying for college this fall, Sallie Mae is offering a new option for those considering borrowing to cover costs.

The private lender said Tuesday that it is now providing parent loans at a lower cost than the government. Sallie Mae joins an expanding market of companies promoting alternatives to the federal Parent Plus loan, one of the government’s most profitable student aid programs. The federal program has come under fire for high fees, minimal protections and saddling parents with debt they cannot afford. Consumer groups, nevertheless, remain wary of private education loans.

Compared with other products on the market, Sallie Mae’s parent loan has some of the most flexible terms. Parents can borrow up to the full cost of college attendance, whereas Citizens Bank caps its lending at $90,000 for an undergraduate degree and $110,000 for a graduate degree. The new loan is also available to any creditworthy adult wanting to help with the cost of college, not just parents.

“Families don’t all think about how to pay for college the same way,” said Charles P. Rocha, executive vice president and chief marketing officer of Sallie Mae. “We wanted to have a broad enough product suite that allows you to put together your financing plan in a way that works for you.”

Sallie Mae, like other private lenders, is not charging any fees for originating or dispensing the loan. In contrast, the government slaps on a 4.2 percent fee for making loans to parents. The new private loan also comes with fixed interest rates as low as 5.74 percent, a full percentage point lower than the federal parent loans for the 2015-16 academic year.

But government loans are only offered at fixed rates, and parents don’t have to have impeccable credit to qualify for the lowest rate. Interest rates on Sallie Mae parent loans can climb as high as 12.87 percent on a fixed loan or 10.37 percent on a variable rate loan based on the borrower’s credit.

Although college price increases have slowed in recent years, the amount of money families are expected to pay remains high. After taking grants, scholarships and tax credits into account, one year at a four-year public university, including tuition, fees and room and board, costs an average $14,120 for a fulltime, in-state student in 2015-16, accord- ing to the College Board. At private nonprofit colleges, the average net price is almost double, at $26,400.

Because the government caps the amount of money students can borrow each year, parents frequently take on debt to help out or co-sign private loans for their children. Private student loans, however, have drawn criticism for having inflexible repayment terms and weaker consumer protections than federal loans. But in recent years, more banks, credit unions and other financial firms that provide education loans have been offering competitive terms — flexible repayment periods, refinancing and loan modifications.

While the government’s generous income-based repayment plans for students are unmatched in the private market, federal parent loans are excluded from all but one of those plans. Parent Plus loans are only eligible for what’s known as income-contingent repayment, which caps monthly bills at 15 percent of disposable income but offers no form of debt forgiveness like the other plans.

Given the dearth of repayment options and high fees attached to federal parent loans, some say the private market may be a better option. Still, the Institute for College Access and Success advises families to max out federal student loans before turning to private ones because of the wealth of protections and repayment options.

Sallie Mae is offering two repayment plans for its new parent loan. People can either make monthly interest payments for up to two years while students are enrolled in school, or pay down the principal and interest during that time. Rocha said the company will consider loan modifications to lower payments for families who struggle to repay the debt.