One of the biggest draws for student loans is the fact that you don’t pay until after you graduate. This allowed poor college students breathe a bit more easily while working part-time jobs and struggling to make ends meet. Sallie Mae has introduced new terms on their private loans that requires monthly interest payments while students are still in school. While this definitely helps to lower the total amount of interest paid on the loan, the additional requirements and the monthly payments may make this loan less appealing.

Reducing Default Rates on Student Loans
With student-loan default rates climbing lately, Sallie Mae is trying to get creative. Other lenders have made noise about creating similar new loans. The repayment period is also being cut down from the industry standard of 15 to 25 years to under 15, sometimes as low as 5. Forbearance restrictions have been re-upped as well, leaving us to wonder exactly what constitutes ’serious financial hardship’ (as opposed to regular, old financial hardship).

This change affects Sallie Mae’s private loans. Those with loans out already should be advised that this change has gone into effect, so you’ll be starting to make those monthly payments very soon, if you haven’t already.

Pros and Cons of the New Plan
Monthly installments on interest lower the total amount paid over the term a full 40% in many cases. This is huge, but there’s a little catch. Students who rely heavily (or completely) on loans may actually need to borrow more money to be able to make these payments. Exactly how much depends on the size of the original loans and other factor, but it seems like this would cancel out much of the benefit of this new plan.

The tougher restrictions on loans, the monthly payments, the shorter term–all of these will hopefully encourage more responsible borrowing. The lenders have been forced to become more responsible, thanks to the current credit crisis. It’s the borrower’s turn.