Money doesn't actually talk. We do.

Our Holiday Wish List: Five Things from Student Loan Lenders

Last week Ron mused about the kinds of things we’d all like to get from our credit-card companies. This week, it’s student-loan lenders’ turn.

Student-loan providers are notoriously evil unaccommodating, perhaps forgetting that most of their clients are at the stage in their lives where they’ve just been granted the right to vote and can’t yet enjoy a vodka tonic. Although federal loans (i.e. Stafford, Perkins, Parent/Grad Plus) generally have better terms than private loans (loans that function like personal loans), both industries are in dire need of a makeover.

Here’s some stuff we’d like from student lenders:

1. No more confusing words like LIBOR and PRIME

We wish lenders wouldn’t use confusing words like LIBOR and PRIME when telling us about interest rates. Lenders often tell you that your rate is 3-month LIBOR + 5.35% or PRIME + 4.00%. We’ll spare you a complete explanation of LIBOR and PRIME; all you need to know is that these are indexes that change regularly and have interest rates pegged to them. Right now the 3-month LIBOR is 5.06%. You basically have to add the two to find out your rate: 5.06% (current 3-Month LIBOR) + 5.35%= 10.41% (your rate). So why can’t they just say that?

2. Fixed Interest Rates for Private Loans

Federal student loans already have fixed interest rates that don’t change for the life of the loan and are disclosed upfront. Mortgage borrowers also have this option and have for ages. But private student loans use variable interest rates (since they’re linked to those annoying LIBOR/PRIME indexes), which means that you have no idea what your rate will be in ten years when you’re still paying off the loan.

One note: Some lenders will let borrowers consolidate loans into one fixed-rate loan. Consolidation should not be a prerequisite to rate-certainty though.

3. Don’t Lower our Credit Scores

Like many loans, you have to apply for student loans to find out what interest rate you’ll pay. Borrowers with better credit histories get better rates. Fine.

But if you choose to shop around and apply for numerous loans at once in order to find the one with the best price, this can actually lower your credit score. This sucks, and it sucks uniquely for student-loan borrowers: Fair Isaac, the company that generates your FICO score, has tweaked its score-generating alogorithm so that it doesn’t ding adults shopping around for mortgages, but kids and families seeking student loans get no such treatment.

Given that this process is hurting their customers, we think student-loan lenders should demand that Fair Isaac do something about this. We’ll have (a lot) more to say on this topic in the coming months.

4. More Immediate Discounts

Student lenders often try to attract customers with so-called borrower benefits. Unfortunately, these benefits are often discounts that kick in only well into the repayment period, not right at the beginning of it. A common benefit is when lenders reduce your interest rate after 48 consecutive on-time payments. Few people in their twenties, however, manage to make so many prompt payments. Thus, they fail to qualify for the discount.

We want more upfront discounts that we can actually use, like waived origination fees and discounted rates that kick in right away.This hasn’t happened yet in part because lenders have spent their money wooing financial aid officers who can steer students their way — and not on passing the deals straight to borrowers.

5. No More Harsh Late-Payment Penalties

Often when lenders give you some sort of discount for having X number of on-time payments, they take it all away based on just one late payment. We think that’s harsh, since they’re serving a market of transient young people. And while federal-loan lenders charge late fees that are typically 6% of the missed payment, private loans can charge anything they please—sometimes a flat-dollar amount and other times a (sky-high) percentage of the missed payment. We think the student-loan industry should be more understanding and sympathetic to the demographic it serves and quit acting like loan sharks.

–Irina Aleksander

Image: fewings.ca