Repaying Sallie Mae starts before graduation

“The freshman 15” may no longer just apply to college weight gain. Now the extra baggage a student carries during the first college year could be fiscal.

Sallie Mae, the nation’s largest provider of private student loans, is replacing its usual version of the student loan with a shortened model that will require some students to begin repayment while they are still in school.

While many students count on a six-month post-graduation cushion to begin repayment of loans - giving them time to secure employment, particularly in a tough labor market - they may no long have such a safety net if they need private money to finance higher education.

The lender, formally known as SLM Corp., announced plans Friday that will require private student-loan repayments to start when the borrower is a freshman, with the amount due rising as he or she moves closer to graduation. The goal: by the time a student graduates, he or she will be paying solely on the loan’s principal, having already paid off the interest while enrolled.

While the new loan will create an obvious quick cash flow for lending banks and can save students money, it can also drive some students with already tight budgets away from private lenders. College students typically rely on federal student loans and private loans, or both.

Jack Hewes, the chief lending officer for Sallie Mae, said the cost of a private student loan would be cut by 40 percent, and students and families would repay the loans more quickly, in five to 15 years instead of 15 to 30 years.

The new financing, available starting Monday for the 2009-2010 academic year, will also keep loans from ballooning out of control over the years because of deferred interest, which often puts some students in a deeper hole.

Sallie Mae said a student who borrowed $17,000 over two years would have freshman-year payments that could start out at as little as $40 per month. By the time that student enters the second semester of sophomore year, the payments could reach $160 per month - until graduation. After that, the student would be responsible for repaying just the $17,000 principal, cutting the time to repay the entire loan significantly, with the final cost of the loan at $28,000 rather than $45,000.

Even as that figure represents significant savings to the student over the years, it seems to negate the very reason students take out loans - so they can attend school without the burden of having to get a side job.

With the new loan requirements, Sallie Mae could potentially lose clients, one higher-education specialist said.

“If you don’t like that arrangement, there are other alternatives,” said Sheldon E. Steinbach, a higher-education attorney in the Washington office of the law firm Dow Lohnes. “This is not the only means to securing private loans. If that is what they are offering, students can look for a better deal. There are plenty of those out there.”

Beyond that, banks dealing with young student borrowers may be building long-term relationships, he said.

“The bank is in this game because they do make money,” Mr. Steinbach said. “If they handle their accounts with students appropriately, they may build in shrinking marketplace clients for life. You have a good experience with Wells Fargo or Bank of America, for example, and you are likely to stay with them forever.”

For students who need loans to complete their education, Mr. Steinbach noted that the money is available, federal and private.

“It’s easier if they don’t have to pay it off while they are in school because most aren’t making any money,” he acknowledged. “That’s why the system was devised the way it was.”