The credit industry lends a helping hand – to itself

Sallie Mae, the nation’s leading private college loan lender, recently rolled out a new Smart Option Student program. Its innovation: borrowers must repay interest from the get-go rather than following the normal route of deferring all payment until graduation.

Sallie Mae rightfully points out that by paying interest from day one, the total cost of the loan will be much lower than if you defer payments and have the interest costs added to the loan principal. The Smart Option loan also mandates a shorter loan term between five and 15 years-again in the name of helping borrowers reduce their overall interest costs.

That’s all well and good, but marketing this as a great step forward for consumer-friendly student loans seems to only tell half the story. This is also just good business for Sallie Mae, and that no doubt is a major motivation behind this program.

The private college loan industry has been ravaged by the credit crisis. Rolling out a new product that is backed by an immediate income stream (the interest payments owed by the borrower from day one) gives Sallie Mae instant cash to pay its investors or issue new loans, rather than having to wait the typical four years for the income spigot to be turned on.

Around the same time Sallie Mae launched its “smart” option college loan, Chase unveiled its own tough-love medicine for thousands of its credit card customers: it boosted the required minimum monthly payment on a number of its accounts from 2% to 5% of the balance. This one smacks of the drug dealer pushing the client into rehab. Is it good for the client? Absolutely. The faster you get that debt paid off, the better. But let’s be real: the motivation for this is to help Chase, not its credit card customers.

After years of luring in customers with lenient repayment terms, Chase now decides to switch gears and impose new rules that just happen to help the company improve its bottom line. Yet with unemployment at a generational high and families struggling to boost their emergency savings during this harsh recession, having your credit card company come out of left field and suddenly insist you increase your payment rate seems like it is going to cause plenty of short-term pain — for a patient that is already not feeling too chipper.

— Carla Fried

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