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New student loans require payments while in school

March 21, 2009|David Colker and Jerry Hirsch

Attention class, there is about to be a major change in student loans.

As of Monday, some private loans will take much less time to pay off, which ultimately will save you money.

The bad news: Students will have to start making monthly payments of at least the interest while still in school.

It's a radical shift for private loans offered by SLM Corp., better known as Sallie Mae, the nation's largest student lender.

Previously, nothing was due on these loans until graduation.

Under the new rules, students -- or their parents -- will be required to began making interest-only payments about a month after the loan is funded, adding to the cost of college.

The payments could run as high as $550 a month on a $60,000 private loan while the student is still in school, said Mark Kantrowitz, who runs FinAid.org, a student financial website.

To avoid the payment while in school, a student would have to instead turn to a non-Sallie private loan, or a federal government loan, neither of which will be affected by the new rules.

Or students could make a change in educational plans.

"They might have to switch to a less expensive school or drop out," Kantrowitz said.

Dylan Rubin, 19, a USC sophomore who is an unpaid intern in Los Angeles Mayor Antonio Villaraigosa's office, would have found himself in that situation.

His loans to pay for tuition and expenses are as much as $10,000 a year.

"I would not be going to USC" if the new terms were already in effect, Rubin said. "I would have picked a public college that cost less if I had to start to pay on the loans when I was in school."

Anthony Olton, 21, a senior at Cal State Long Beach, hopes to go to graduate school to become a physician's assistant. He figures tuition will be $20,000 to $25,000 a year, on top of the $30,000 he borrowed for his undergraduate education.

"I was planning to go to school full time and make it straight through," he said. "There are a lot of classes, and I need study time."

On the upside, a typical loan under the new program will take an average of about seven years to pay off after graduation instead of about 20 years under the old rules, Kantrowitz said. Also, the total amount of interest paid during the life of the loan could be cut by about one-third.

Martha Holler, spokeswoman for Sallie Mae -- which made $6.3 billion in private student loans last year -- said the new rules would make it easier for students to pay off their loans and get on with their lives after college.

"We want them to be able to satisfy their loan obligation by spending as little as possible," she said, "and getting it over as quickly as possible."

Sallie Mae also hopes the monthly payment habit will help deter students from over-borrowing, possibly leading to a future default.

"When you have to write that check every month, then you're reminded of the obligation you've taken on," Holler said.

But making that monthly nut these days could slow or halt a college education.

Phillip Cabrera, 25, is in his last year at Pasadena City College and plans to start Cal State Fullerton in the fall. He said he'd be willing to work to meet increased expenses.

"I will need student loans but I have no job and I have been looking since December," Cabrera said.

He has applied for work at banks and restaurants but has been tripped up by the poor economy and his need to have flexible hours that fit with a class schedule.

"It's really tough," he said.

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david.colker@latimes.com

jerry.hirsch@latimes.com

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