Student Loans for K-12 Education on the Rise

Education expenses are rising at colleges and universities across the country. But parents are also finding that the education bubble is engulfing private grade schools.

SmartMoney, a publication of Dow Jones, noted the trend in a piece last month. According to their sources, demand for loans to cover private K-12 education was up 10 percent in March when compared to the same month a year ago.

Several lenders are getting back into the space as demand increases. And a rise in private school tuition is the primary driver.

The National Association of Independent Schools says that private school tuition has increased 26 percent from the 2006-07 school year. This has led to a decrease in private school enrollment, but has also created a new demographic of borrower that should be attractive to the ARM industry.

Some 20 percent of families that applied for private K-12 school loans in the 2010-11 school year had household incomes above $150,000. And while the market is not yet fully mature, many of the lenders participating are respectable creditors.

Sallie Mae, for example, has an extensive program for K-12 education lending. Parents can select a variety of loan terms (with repayment periods of up to three years). But the interest charged on the loans can be quite high. Sallie Mae charges a minimum of LIBOR + 7%. Right now, that calculates to an attractive annual interest rate of 7.25%, since LIBOR is currently 0.25%. But if interest rates rise, the costs begin to look fairly unattractive. Sallie Mae does, however, offer loans with no prepayment penalties.

As K-12 education becomes more competitive and expensive, it’s a good bet that these types of loans will grow into a considerable ARM market.

Does anyone out there have any experience collecting on K-12 education loans?