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Private Lenders Ease Rules on Grads

Chris Metinko

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NEW YORK (MainStreet)—With outstanding student-loan debt in the U.S. totaling more than $1 trillion, two of the nation's largest providers of private student loans are trying to ease the burden on borrowers.

Both Sallie Mae and Discover announced small changes that may help lighten the load on recent graduates who face a mountain of debt. Sallie Mae now will allow college graduates to apply for a one-year, interest-only payment period — after a six-month grace period — instead of making full principal and interest payments.

The new feature is available to both recent undergraduate and graduate students starting this month.

Similarly, Discover said it will stop charging borrowers with new student loans a penalty when they pay their bills late.

"We believe in providing students with affordable options to pay for college and graduate school, as well as their post-graduate studies," said Robert Weiss, a Discover spokesman. "We wanted to make our loans even more affordable for students."

According to a recent report by the Consumer Financial Protection Bureau, private student loans account for more than $150 billion in outstanding student debt in the country. There are at least $8 billion of private student loans in default — representing more than 850,000 individual loans.

While the changes may help some repay their private student loans, some experts say the modifications are minor and not enough to level the field between private and federal student loans, which often have more flexible repayment options and long-term forbearance.

"These look like cosmetic changes," said Lauren Asher, president of the Institute for College Access and Success, a nonprofit advocacy group. Asher said she recommends that private loans only be used after all federal aid options are exhausted — something many students do not do. She added private loans also are hard to get forgiven, even in bankruptcy.

"Private loans are as much a form of financial aid as a credit card," Asher said.

Deanne Loonin, an attorney with the National Consumer Law Center and director of the center's Student Loan Borrower Assistance Project, agreed the changes will be seen as a panacea by few.

"Our view is that additional flexibility such as short-term interest only plans can be useful to some borrowers," Loonin said. "However, particularly when it comes to our low-income clients and others like them, these short-term options are only prolonging inevitable default.

"We believe that the private lenders must first take responsibility for the predatory loans they made in the past and offer real relief for these borrowers, including principal reduction and discharge in some cases," she added.

Mounting student debt may soon not just be a problem for borrowers, but the economy as a whole.

The Federal Reserve Bank of New York recently released a study showing young adults not burdened by student loans are more likely to take out mortgages and car loans.

The study showed the rate of home ownership for 30-year-olds burdened by student loan debt was almost 2% less than those without. The same was true of car loans, with student-debt-free 25-year-olds more willing to take on such a loan than those already facing student debt.

The study concluded those stressed by student debt may be unwilling to take on such loans and mortgages due to both lowered expectations of future earnings and more limited access to credit.

"Both these factors ... may have broad implications for the ongoing recovery of the housing and vehicle markets, and of U.S. consumer spending more generally," the report reads. "While highly skilled young workers have traditionally provided a vital influx of new, affluent consumers to U.S. housing and auto markets, unprecedented student debt may dampen their influence in today's marketplace."

--Written by Chris Metinko for MainStreet