The first is to cheer. Borrowers now have a choice similar to people buying homes. Those who want certainty can pay extra for it, while those who wish to roll the dice and hope interest rates don’t rise too much can do that, too.

The second response is to rail against the fact that these loans are even necessary. After all, the federal government will lend most undergraduates up to $31,000. That this is not nearly enough for many families to cover the bills at all sorts of colleges is some kind of national disgrace, right?

Both reactions, it turns out, are valid. So let’s consider them one at a time.

But first, a review (and a semiofficial renaming of the loan at issue here). Not so long ago, federal student loans were variable and you could get them from a bank. Now, they are fixed at as little as 3.4 percent for this coming school year, and you borrow directly from the government.

The federal loans are a good deal, but they are often not enough make up the difference between what a family has saved or can spend out of current income and what the student gets in grants and scholarship money.

This is where private student loans come in — and proceed to send some undergraduates’ total debts spiraling into the six figures by the time they manage to earn a bachelor’s degree. While the government recently introduced lower federal loan payments for graduates with limited income and loan forgiveness for people in public service jobs, the banks don’t have similar programs for their private loan borrowers.

And about this name — private student loans. It’s factually inaccurate. To get the lowest rates, a teenager with limited credit history will need a co-applicant, which usually ends up being a parent.

The vast majority of these loans end up being a joint effort, so let’s call them what they are: private family loans. Yes, banks will often absolve the co-signer of responsibility after a couple of years if every payment has arrived on time, but forgetful young adults don’t always do that. (This, by the way, creates black marks on everyone’s credit history, not just the student’s.)

So here come U.S. Bank and Wells Fargo with their new fixed-rate family loans. Both last for 15 years. The crucial difference is that U.S. Bank offers only one rate: an annual percentage rate of 7.8 percent. An upfront fee can raise the actual annual percentage rate on the loan to as high as 8.46 percent.

Wells Fargo’s fixed-rate loans have no origination fee and are as low as 7.29 percent (or as much as another percentage point lower if you’re a current Wells Fargo banking or education loan customer). But if you don’t have excellent credit, the fixed rate could be high as 14.21 percent for community colleges or trade schools.

The current variable rate ranges from an annual percentage rate of 3.39 to 10.22 percent at U.S. Bank and 3.4 to 11.74 percent at Wells Fargo. Given the size of the gap and no signs that rate increases are imminent, why introduce this option now?

“We think that students and parents are looking for some level of certainty in the long run,” said Lucille Conley, senior vice president of consumer lending for U.S. Bank. “They’ve seen things happen in the housing market that may cause them more concern than they might have had four or five years ago.”

The bankers aren’t suggesting that borrowers actually try to do the math. In fact, it’s nearly impossible. The banks haven’t created calculators that allow you to input a series of interest rate spikes and declines at various points along a 15-year timeline and then compare it with a fixed rate. And since the professionals have no idea themselves what interest rates may do, it makes little sense for them to encourage their customers to guess.

Instead, this is a product for people who sleep better at night knowing what their payment is. Turns out there are lots of people like this. Kirk Bare, Wells Fargo’s business head of education financial services, said the bank was expecting a fairly low adoption of the fixed-rate loan and has been surprised by how many families have chosen it so far.

This is a fine thing, as far as it goes. Fine, that is, until you stop to think about what the mere existence of the private family loan actually means.

Article source: http://feeds.nytimes.com/click.phdo?i=0a98ba38b0c1fe82ff70cbf3008b7d6f