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Students could save a lot if they met lenders' conditions, but few do

WASHINGTON—Lenders often promise students big breaks on their loans if they make their payments on time. That sounds easy. Who wouldn't?

Actually, 19 out of 20 student borrowers don't, according to the banks. The conditions are clearly spelled out in the loan terms, but it's a gain that few borrowers will ever see.

"Save up to 4.70 percent with our Triple Payback program!" is the way Wachovia puts it on its Web site, www.educaid.com.

Sallie Mae's "Cash Back" program does much the same, and the promised savings could really add up. The lender's Web site includes a chart that shows savings of $1,184 over 10 years on a $20,000 loan.

But in Sallie Mae's case, you lose the benefits if even one of the first 33 payments is late. It's 24 payments for Wachovia and 12 for a third big student lender, Bank of America.

Because the government fixes interest rates on the loans it backs, lenders use "borrower benefits" to compete with one another. They work a lot like the low introductory rates that credit-card companies offer when they're seeking new members, rates that go up sharply after one missed payment.

Jennifer Darwin, a Wachovia spokeswoman, said that only about 5 percent of students earned loan rebates or interest-rate cuts. That's true even after the lender reduced the required number of on-time payments from 48 to 24.

Ken Redd, the director of research at the National Association of Student Financial Aid Administrators in Washington, said the story was the same for most college borrowers.

"Only 5 percent, or in some cases even less" qualify, he said.

The offers involve Stafford loans—government-backed money that's borrowed in the student's name at a fixed rate—and similar loans that are in the parents' names. They also involve unsubsidized student loans.

The problem often occurs with early payments, when mail goes to addresses that might be out of date for frequently moving students and graduates. Combined with financial inexperience or youthful irresponsibility, that can lead to late payments. "If you're late one or two days, the deal becomes nullified and you lose out on the benefit," Redd said. "As it turns out, the vast majority of borrowers end up in that situation."

Kenneth Kogut, a financial-aid officer at Hamilton College in Clinton, N.Y., said he suspected that lenders offered the benefits knowing that few students would qualify.

Redd agreed. "The fact of the matter is that in a year or two's time, most people are late with at least one payment. It's just the law of averages working in their (the banks') favor."

One way to assure on-time payments is to set up a direct debit for student loans so money is withdrawn automatically from a savings account each time a payment is due. This eliminates late payments as long as there's money in the account.

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(c) 2005, Knight Ridder/Tribune Information Services.

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