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Student Loan Price War: Banks vs. Feds

For the time ever, students may find it cheaper to borrow from a private bank than the federal government.

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Though most banks traditionally offered only variable-rate student loans, a growing number recently began giving borrowers low fixed-rate options. On Monday, Sallie Mae and Discover, the first and third largest private student loan lenders respectively, became the latest to offer fixed rates. They join Wells Fargo, the second biggest lender in the space, and five other private lenders in total, according to That’s up from just one bank a year ago. Sallie Mae’s fixed rates start at 5.75%, which is lower than the 6.8% rate on federal unsubsidized Stafford loans. It may also soon be cheaper than the subsidized Stafford loan — whose rates are expected to spike to 6.8% this summer, up from 3.4% currently.

For years, students turned to private banks after exhausting their annual allotments for both the subsidized and unsubsidized federal loans. Rates were traditionally not only higher on private loans, but variable. Typically tied to the prime rate, the monthly loan payments could rise substantially over the course of repayment – and might even become unaffordable.

The trend toward fixed-rate private loans picked up over the past year. Lenders are cognizant that borrowers want to protect themselves against a rising-rate environment, says Mark Kantrowitz, publisher of The changes also come as tuition costs continue to rise, free aid becomes harder to get, and more families turn to loans to fill in the gaps. More than 1.8 million bachelor’s-degree recipients are projected to graduate this year with college loans, up 41% from five years ago, according to

To be sure, experts say it would make sense for few borrowers to opt for a private loan before exhausting the federal options. For one, while federal loans offer the same rates to all – regardless of credit — the lowest rates on the private loans are strictly for borrowers with blemish-free credit reports. Undergraduates will likely also need a co-signer. Also, if the subsidized Stafford rates spike to 6.8% this summer, this loan could still be cheaper for undergraduates since the government will continue to cover their interest payments while they’re in college.

And even for those who qualify for Sallie Mae’s lowest fixed rate, the savings could be small: on a $10,000 loan over five years, borrowers will pay $1,530 in interest with Sallie Mae, $294 less than they’d pay on an unsubsidized Stafford loan. (For borrowers who need more years to pay off the loan, the savings with the Sallie Mae loan would be larger.) Other lenders’ fixed-rate loans are still slightly lower than the government’s. Discover’s lowest fixed rate is 6.79% while Citizens Bank and Charter One’s start at 6.75%.

Borrowers with good credit who are planning to pay off student loans in the next couple of years could use a different strategy. Starting rates on variable-rate private loans are at rock-bottom lows. Sallie Mae’s start at 2.25% while Discover’s start at 3.25%. If borrowers can qualify for those rates and plan to pay off the loans in the next two years – the Federal Reserve has said it plans to keep rates unchanged at least through 2014 — these loans could be more affordable. A borrower who pays a $10,000 loan with a 2.25% rate over two years would pay a minimum $236 in interest, or at least $487 less than they’d pay the government. But those savings might not be worth it for borrowers who think they could be stuck with the loan longer term when rates are likely to start rising.


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    • Nice post with great information.I am stunned I haven’t found you on the streets to pummel you into a sad, tearful ball of pathetic-sens.

    • Nope, as the loan won’t be a student loan any more but a pesronal loan.If you can get and keep that rate until the loans are paid off then that would be the way to go even with the loss of the student loan interest deduction. Even if you’re in the highest tax bracket and can deduct all of your student loan interest (unlikely on both counts) your 6.8% works out to 4.42% after tax at best. You’ve beat that soundly at 2.7% so go for it as long as it can’t increase to some higher rate in the future before it’s paid in full.

    • Student loans are for those who did not work hard enough to earn scholarships. I know people who will owe $20,000 or less following 4 years at a $55,000/year university (including tuition and living expenses).

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