Student loan provider offers online savings

NEW YORK (CNNMoney.com) -- Students can now pay their college loans and save with Sallie Mae.

The largest U.S. student loan company took its first steps into retail banking Tuesday with the launch of two new online savings accounts.

The Reston, Va.-based company said it will offer high-yield savings accounts with a 1.35% interest rate and certificates of deposit offering rates from 1.50% for 12-month CDs to 3.00% for 60-month CDs.

The savings rates will trump the national average of about 0.27% and the CDs are also competitively priced.

"We thought it would be a great time to offer more products," said Kelly Christiano, vice president of retail deposits for Sallie Mae (SLM, Fortune 500), which has over 20 million customers in its student loan and Upromise programs. "We can do some interesting things that other online banks can't."

The company said the new FDIC-insured products will complement its existing 529 college savings plans from its Upromise Investments division. And its Upromise rewards program, which helps customers save money by offering points for everyday purchases, is an added sweetener.

The programs are available to both those with Sallie Mae loans and new customers.

Although Sallie Mae has had a bank since 2005, it did not collect customer deposits, a cheaper source of funding for banks. Tuesday's move will help it to diversity its balance sheet, which was squeezed by the credit crunch.

"We want to diversify our funding base, and retail is one excellent way to do that," said Christiano.

Sallie Mae's first foray into retail banking won't be a cakewalk. With competitors including ING Direct and the online banks of larger financial institutions, Sallie's role as the 800-pound gorilla of the student loan industry could hurt it.

"Not all borrowers think highly of them," said Mark Kantrowitz, a financial aid expert and publisher of FinAid.org and FastWeb.com.

Still, savers looking for a deal on savings rates might take a look. "If customers are looking for good rates, they may go for Sallie Mae even if they don't have warm and fuzzy feelings about them," Kantrowitz said.

But, before you divorce your current bank, shop around. While Sallie Mae's rates top the national average, there could be better deals out there.

"Sallie's yields are competitive, but there are quite a number of banks offering higher returns," said Greg McBride, senior financial analyst for Bankrate.com.

Though some banks with higher rates may require minimum balances or charge monthly fees, McBride says customers will still benefit from looking around.

"There is no shortage of banks competing for your business," he said.