Graduate Private and Federal Loans: 101 Presented by: Patty Herbst, College Loan Corporation

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• Graduate Private and Federal Loans
  101Presented by Patty Herbst, College Loan
  Corporation
• Shauna Carleton, Nellie Mae  Marilena Botoulas,
  Columbia Business School

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What is a Private Loan?

• Commonly referred to as an alternative loan
• A consumer loan specifically for education
  financing
• Created to fill the gap between awarded aid and
  expected family contribution or unmet need
• Not regulated by FFEL or the DOE
• Private Loans are credit based

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Why are Private Loans So Popular?

• Tuition costs are on the rise interest rates on
  the decline
• Recession has depleted savings
• Parents want the student to take responsibility
• No collateral required

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True or False?

• Student has full responsibility.

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True or False?

• Student has full responsibility.
• False - Parents who co-sign have the same
  responsibility as if they took out PLUS when
  student doesnt repay

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True or False?

• Private loans have the same regulatory
  requirements as federal loans

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True or False?

• Private loans have the same regulatory
  requirements as federal loans
• False. Private loans are regulated by Reg Z
  (same as a credit card)

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Prime vs. LIBOR

• Most private loans today use either the Prime
  Rate or the LIBOR Rate.
• Prime rate adjusts based on the economic health.
  LIBOR is adjusted regularly.
• Since 1993, prime has been as high as 9, while
  during that same period, the one-month LIBOR was
  never higher than 3.203.  In 1981, Prime hit a
  high of 20.5.

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History of the Prime Rate and LIBOR Source
www.briefing.com
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What are the current rates?

• 91 day T-Bill 4.74
• 3-month LIBOR 5.14
• WSJ Prime 8.0

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Facts About Private Loans

• Many private loans require a co-signer.
• Rates are often variablethere is no cap.
• There is no collateral requiredjust a signature.

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What do lenders offer?

• Many lenders have online applicationsinstant
  credit decisions
• Many private loans are disbursed directly to
  school and require school verification of
  enrollment
• Most require school approval
• Note some lenders send loan funds directly to
  the student with no school certification required.

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Pros of Private Loans

• Immediate credit decisions
• Some programs allow students to borrow for
  past-due balances.
• No federal regulations govern the programless
  paperwork for the school
• Easy applicationssome online

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Cons of Private Loans

• Volatile Interest Rates
• Credit approval may take longer can require
  more documentation
• Based on financial need
• Cannot be consolidated into federal program

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More Cons

• May carry fees (front end and back end also may
  be pre-payment penalty fee)
• Interest may be capitalized more than once
• Some not dischargeable upon total disability or
  death of borrower

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What is Credit Scoring?

• Fundamental way to tell if a loan is likely to be
  profitable
• Review of student co-signer (if applicable)
  credit history
• May be used to accept/deny or set rates and/or
  fees

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Nationally, 15-20 rejection rate for bad credit

• Likely to increase !

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What is the PLUS Loan for Grads?

• New! for AY 06-07
• Federally sponsored credit-based education loan
  for students attending graduate school
• Created as an affordable supplement when the
  Federal Stafford Loan is not enough

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What is the Eligibility Criteria?

• Must
• Be at least 18 years of age
• Have a valid Social Security number
• Be enrolled at least half time in a graduate
  program
• Be a US citizen or eligible permanent resident
• Be meeting SAP (satisfactory academic progress)

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Is There Credit Criteria?

• Yes!
• Unlike a Stafford Loan, the students credit is
  checked and it must be good to be approved
• Student cannot have a defaulted Stafford or PLUS
  Loan
• Parents cannot borrow this loan if the student
  has poor credit but can be an endorser

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Is the Endorser like a Co-borrower?

• Yes!
• The Endorser borrows the loan with the graduate
  student when the student does not qualify on
  his/her own
• Same credit criteria applies
• Endorser will be responsible for the loan if the
  student borrower does not pay
• If applying with an Endorser, like on a Private
  Loan, a new application (MPN) must be signed each
  year an Endorser is used

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Interest Rate Fees

• FEEL Graduate PLUS - Fixed rate of 8.5
• FDSL Graduate PLUS Fixed rate of 7.9
• Fixed rate ensures student is not effected by
  variable rates that can increase over time
• 3 Origination Fee
• 1 Federal Default Fee (may be paid by lender or
  guarantor)

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Loan Amount, Repayment and Benefits

• Annual amount of 100 up to the cost of
  attendance less other aid
• Unlike some private loans, there is no annual or
  aggregate limit
• Deferral of principal payments while enrolled in
  school interest needs to be paid or will be
  capitalized
• Repayment alignment with Stafford Loans may be
  available
• Up to 10 years to repay with the same repayment
  and deferral options as the Stafford Loan
• Money-saving repayment incentives available to
  reduce overall cost of the loan (varies by
  lender)
• Interest Rate reductions for auto-debit and
  on-time payments
• Balance credits

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Is the School Involved?

• Yes!
• School must certify loan prior to disbursement
• Loan funds are disbursed directly to the school

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Application Process

• Graduate student completes same PLUS MPN as
  parent
• DOE created addendum that lender must include
  with PLUS MPN
• Paper and online application process available -
  (determined by lender and school)

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Private vs. PLUS

• Whats right for your students?
• How do you advise them on what to do?
• How do you help them choose whats right for them?

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Are Private Loans right for your students?

• Made on the basis of a signature
• No collateralnothing to repossess
• Diploma?
• Credit must be good

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• Imagine
• No job
• No ability to pay
• No collateral
• Low interest rates
• Flexible repayment
• No payments while completing an education
• No federal guarantee

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Private vs. PLUS Whats right for your
students?

• This will be different based on your population
• In many schools, there is a divide with most
  students leaning toward the private loan.
  Students range from highly paid investment
  bankers to low income non-profit sector jobs.
• Credit will matter here!

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Private vs. PLUS How do you advise them on what
to do?

• Student Advisement
• First assess how risk averse they are, then
  assess industry, function, salary, bonus and how
  many years they plan to repay the loan.
• Since the interest rate on private loans can
  never be fixed, students will be subject to a
  specific Tier, based on credit history for the
  life of the loan.
• Have them calculate how much monthly payments
  will be.

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Private vs. PLUS How do you advise them on what
to do?

• S.W.A.N Talk to the students about the
  differences between each program. Ask your
  lenders to provide a comparison to assist you
  with this.
• Second Have students pick a private loan
  lender and apply to get a sense of what interest
  rate structure they would receive.
• Third If students are unhappy with the interest
  rate tier for the private loan or do not feel
  comfortable with a variable rate loan, have them
  apply for the Graduate PLUS loan using the lender
  chart (or FDSL standards) provided by the school.

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Private vs. PLUS How do you advise them on what
to do?

• Payback Period
• If students plan to pay off the loan quickly and
  have better than good credit, it may make more
  financial sense to go with the private loan.
• If they are not sure about the interest rate
  risk, if their credit history is less than
  stellar, and if they plan on taking the full
  10-20 years to repay, then the Federal Graduate
  PLUS may be a better program.

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Private vs. PLUS How do you advise them on what
to do?

• Packaging
• Every financial aid package is set up to meet the
  cost of attendance
• We set up the award and call it Alternative
  Loan Eligibility and then the award letter has
  verbiage that explains that they have a choice
  between the fixed rate Federal Graduate PLUS loan
  OR the variable rate private loan

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How do you help students choose whats right for
them?

• Be there for support, but dont give them the
  answer!
• Begin a RFP process to have lenders bid for your
  business. Look for
• Re-insurance and self-insurance
• Origination/guarantee fees
• Fees at disbursement and/or repayment
• What are the repayment options/incentives?
• How many years for repayment? 10, 15, 20, 25, 30
  years?

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How do help students choose whats right for them?

• Let them ultimately choose their lender and
  product. The counseling takes longer but they
  will ultimately have more ownership over the
  process.

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Copies of Presentation

• Copies of this and all of todays presentations
  will be available at www.nysfaaa.org.

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