It may be Financial Aid Awareness month, but the largest student lender for private and federal loans, Sallie Mae, recently pulled out of the subprime loaning market.

This may leave some low credit and income students at private universities scrambling for options.

But for Sacramento State students, it may not be a problem at all.

“This decision is a non-issue for Sacramento State, as we did not issue non-standard private loans on your campus. In fact, it touched only several dozen schools out of our 6,000 school customers,” said Martha Holler, Sallie Mae media representative.

Craig Yamamoto, director of Financial Aid at Sac State, agreed that the pull-out would not hurt Sac State.

“The reason why it won’t affect (Sac State) students is that Sallie Mae won’t pull out of federal or private loans since we are a federal institution with low default rates,” Yamamoto said. “It will mostly be propriety schools with high default rates.”

Sallie Mae eliminated its non-standard private loan programs, which represented about 3 percent of its $164 billion student-loan portfolio. “We did this because a disproportionate number of these loans were to students who did not complete their studies and who then defaulted on their loans,” Holler said.

For-profit schools tend to have higher tuition and expenses than state schools, so default rates can be much higher.Subprime lending is the practice of loaning to borrowers with low credit rates. Sallie Mae’s recent pull-out of the subprime loan may be related to the College Cost and Reduction Act passed last September.

The new law will provide more government aid for students. When loans are not repaid to companies like Sallie Mae, the company can’t build the capital they need. And the secondary companies that back Sallie Mae don’t want to purchase the loans.

Loaning to lower credit students hurts lenders in the long run and the payback time is often spread out far too long or not at all.

This recent law where the government provides more options for students may discourage lenders in the secondary market who buy out Sallie Mae’s loans. Sallie Mae would be stuck with loans that students will not pay back. There is considerable risk involving default rates.

“The decision to eliminate the small non-standard private loan programs was made with the realization that we do help student-borrowers if we make loans that are predictably uncollectible,” Holler said. “Nor do we want to make loans to students who do not graduate and who are left with unmanageable debt and who do not have the benefit of increased earnings that would have resulted if they had received a degree.”

Yamamoto said most Sac State students take advantage of federal loans because they provide more options for them in the long run.

The lending process can be tricky to maneuver, especially in the private sector. If a student is approved for a loan and then doesn’t pay it, then it defaults to a guarantee agency that agrees to pay it and then tracks down the student for the money.

FAFSA, Free Application for Federal Student Aid, may take longer to fill out, but it can be less of a hassle than dealing with approval for private loans.

“There are a lot of deferment options in the federal programs,” Yamamoto said. “We try to tell (students) it’s beneficial. They have less options when they get in trouble and can’t pay.”

Sac State has a low default rate, meaning a lower percentage of students who don’t pay back their loans. Sallie Mae dropping out of lending in subprime categories may have more of an effect on for-profit schools because their default rates tend to be higher.

There is a three-part loaning service at Sac State if the student does not pay it: the lender, school and agency backing the loan.

About 99 percent of students used EdFund at Sac State, Yamamoto said.

“We are a low-cost institution. We really discourage private loans because the fees are higher. The interest and fees are a lot higher and some of them don’t have deferment options,” Yamamoto said.

With federal loans, students have more options by deferring the loan if they aren’t able to find a job directly out of college or if the financial strain is too much.

From 2006 to 2007, Sac State saw $64.8 million in federal loans and $3 million in private loans. But not all private loans are done through the school.

There are different criteria for getting both types of loans. Often private lenders will look at your income history, debt-to-income ratio and require a co-signer or a credit check.

“As long as a student meets the eligible criteria, they don’t have to go through a credit check. They don’t have to have a relationship with the lender,” Yamamoto said.

Sallie Mae backed out of the market in early January.

Students should apply by March 2 to maximize their aid offer for the Cal Grant.

In some cases, financial aid is dispersed on a first-come, first-served basis.

Students can go to http://www.fafsa.ed.gov to fill out an application or visit the Financial Aid Office located in Lassen Hall.

Chloe Daley can be reached at [email protected].