The Washington Post is carrying an article on the same topic I covered yesterday, and I think it’s worth your time to read:

Student-Loan Discounts Cut

Lenders Retrench
As New Law Trims
Payments by U.S.

By JANE J. KIM
October 2, 2007; Page B14

Banks and other lenders who issue federal student loans have begun to scale back a host of borrower discounts after a new law took effect yesterday that cuts federal payments to the lending institutions.

Lenders have long used discounts to compete for borrowers of federal student loans, including Stafford, PLUS loans taken out by parents of undergraduates or by graduate students themselves, and federal consolidation loans. These so-called borrower benefits typically included interest-rate reductions for signing up to have payments automatically debited from a bank account or for making a certain number of consecutive, on-time payments.

Now, in a push by politicians to make college more affordable, the new law, known as the College Cost Reduction and Access Act of 2007, will cut payments to lenders for issuing the federal loans by $21 billion over five years. In turn, the law reduces the cost to undergraduate borrowers who qualify for federally subsidized Stafford loans by lowering the rate on the loans to 3.4% from 6.8% by 2011. It also, among other things, increases the maximum Pell Grant amounts for low-income families.

Feeling their profit margins squeezed, several lenders, including Wells Fargo & Co., Nelnet Inc. and Goal Financial LLC, eliminated many of their borrower benefits on new federal loans. Nelnet also reinstated origination and default fees on its Stafford loans, which were previously waived, of as much as 2.5%. And National City Corp., which had discounted the rate on its Graduate PLUS loan to 6.8%, raised the rate to 7.65% as a result of the new regulations, although this is still below the typical market rate of 8.5% for Graduate PLUS loans.

Some lenders are evaluating their programs. Bank of America Corp., J.P. Morgan Chase & Co.’s Chase, KeyCorp’s KeyBank and MRU Holdings Inc.’s MyRichUncle say their borrower-benefit programs remain unchanged. “We do anticipate there will be changes, and we’re still working through the details of what those changes will be,” says Jill Arslanian, a KeyBank spokeswoman.

Lenders are making the biggest cuts in their federal consolidation loans, which typically have the slimmest profit margins. SLM Corp.’s Sallie Mae and Citigroup Inc.’s Citibank, for example, which kept their borrower benefits on Stafford, PLUS and Graduate PLUS loans, now only allow borrowers to get a 0.25 percentage point rate reduction on consolidation loans for enrolling in automatic payments. Previously, the lenders also offered a one percentage point rate reduction after the first 36 months of on-time payments.

College Loan Corp., which scaled back many of its borrower benefits across its Stafford and PLUS loans, says it is no longer offering any repayment benefits on its federal consolidation loans. And Wachovia Corp. dropped its benefit programs on its federal consolidation loans, which had allowed borrowers to cut their interest rates by as much as 1.25 percentage points. A federal consolidation loan allows borrowers to combine all their federal loans into one loan to lock in a fixed interest rate and simplify and reduce monthly payments.

Mark Kantrowitz, publisher of FinAid.org, says he expects that many lenders will reduce their discounts by about half or eliminate them. And while some lenders might maintain some of their discounts on PLUS or Stafford loans, they will likely make it harder for borrowers to qualify for the discounts. For example, instead of requiring 36 months of on-time payments to get an interest-rate reduction, they might require 48 or 60 months of on-time payments, he says. Borrowers with larger balances may get more of a break, because those loans are more profitable, he says.

The changes may also force schools with preferred-lender lists to re-examine their lists if the changes significantly affect borrowers’ costs, he adds.

Only a fraction of borrowers received all of the discounts offered. Only 20% of borrowers, for instance, are able to make the first 36 months of payments on time, Mr. Kantrowitz says.

Despite cutting its borrower-benefit programs, Wells Fargo says it will continue to pay the 1.5% origination fee on Stafford loans and the default fee of 1%, when a guarantor doesn’t pick up this fee.