Magazine article American Banker

Fears of Student Loan Time Bomb

Magazine article American Banker

Fears of Student Loan Time Bomb

Article excerpt

The historically low interest rates that have led savvy homeowners to refinance their mortgages have also encouraged consumers to consolidate their student loans -- a trend that might impede future education lending, banking officials said Monday.

Students took out about $30 billion of government-backed loans from private lenders in fiscal year 2002, while almost the same amount of existing debt, $22.9 billion, was consolidated under the Federal Family Education Loan Program, officials said at a Consumer Bankers Association conference in Arlington, Va.

Initially the government allowed students to consolidate their loans for convenience -- early in the program, most students carried loans from multiple lenders -- but the current rate environment has exposed some dangers of that policy, according to Jon Veenis, the president of Wells Fargo Education Financial Services.

Taxpayers will pay a hefty price for borrowers' consolidating loans and locking in a 4% interest rate for up to 30 years, because the federal government will pay the lenders more as rates rise, Mr. Veenis said.

Lenders are currently guaranteed an interest rate equal to three-month commercial paper plus 2.2 percentage points for students still in school. For loans that are being repaid, the guaranteed rate is three-month commercial paper plus 2.8 percentage points.

Borrowers who can afford to repay their loans sooner are taking advantage of the low rates, according to Mr. …

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