Sallie Mae Lowers Rates on Graduate Student Loans

Sallie Mae announced March 6 that it's lowering the top interest rate on its fixed rate student loans for graduate students. The lowest rate on its Smart Option Student Loan will remain at 5.75%, but the top rate drops on April 1 from 12.875% to 8.875%, which is just slightly higher than the 7.9% rate on federal Direct PLUS loans for graduate students.

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The top variable rate on the Smart Option Student Loan also will fall to 7.5% from 10.125%. The lowest rate will remain at 2.25%. The rates applicants receive depend on their credit history.

Sallie Mae also offers a fixed-rate loan for undergraduates but is not lowering the top rate of 12.875%. Sallie Mae spokeswoman Patricia Nash Christel says the lender is extending lower rates to graduate students to recognize their education achievement as well as their increased employability and earnings power.

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Sallie Mae's announcement comes just a few weeks before graduate schools typically send out acceptance and financial aid award letters. So applicants who are accepted into a program but don't receive financial assistance from the school will have to start comparing loan options.

Sallie Mae introduced its fixed-rate loan less than a year ago. Although the top interest rate will still be slightly higher than the federal Direct PLUS loan rate, Christel says that the Smart Option Student Loan has no additional fees. The federal PLUS loan, on the other hand, has a 4% origination fee. However, federal loans offer more flexible repayment plans than private student loans. Having that flexibility can be important for graduates who can't find a job and can't afford their loan payments.

However, graduate students who qualify for Sallie Mae's lowest rate on its fixed-rate private loan could come out ahead if they find a job after graduation and don't need flexible repayment options (two big ifs). For example, students with a $10,000 Smart Option Student Loan with a fixed rate of 5.75% would pay a total of $15,737 over the life of the loan if they deferred payments until after graduation. They would pay $17,585 with the federal government's loan with a 7.9% interest rate and 4% origination fee. That's why, Christel says, Sallie Mae encourages applicants to weigh all available financing options, rates, fees, and total costs along with their career plans in mind.

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Cameron Huddleston wrote the daily "Kip Tips" column for Kiplinger.com. She joined Kiplinger in 2001 after graduating from American University with an MA in economic journalism.