Private Education Loans 101: Helping students compare student loan options

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1 Private Education Loans 101: Helping students compare student loan options Presented by: Erin Gjerde and Denise Burmeister Account Executives Wells Fargo Education Financial Services 2013 SASFAA Conference 1

2 Agenda Student Loan Options Students should carefully compare options Federal loan options Private student loan options Comparing Student Loans How to decide Cost comparison questions Repayment comparison questions Private student loans are sometimes a lower cost option Rate choice Repayment Scenarios The Role of the School Questions? 2

3 Student Loan Options 3

4 Students should carefully compare options When taking out a student loan, students should carefully compare all their options, including both federal and private student loans. Every family s circumstances are unique. No one answer will work for everyone. Encourage students to complete the FAFSA and explore all the low-cost or no cost options available to them. 4

5 Federal Student Loan Options When looking at the federal student loan program, there are important changes that students should know about. For federal student loans disbursed on or after July 1, 2012: * Origination fee rebate was eliminated No Direct Subsidized Federal Direct loans offered for graduate students Interest rates are: 6.8% for the Direct UnSubsidized Federal Direct loan for undergraduates 7.9% for the Direct PLUS Loan for Graduate and Professional Degree Students + a 4% origination fee * Budget Control Act, Consolidated Appropriations Act, College Cost and Reduction Access Act 5

6 What are Private Education Student Loans Private Education student loans are credit-based loans, certified by schools, with flexible repayment options. Private Education Student Loans are available to students, parents, or any adult willing to borrow for the benefit of the student. They may be used for any eligible education related expense such as tuition, room and board, books, or even a computer. Students can also use Private Education Student Loans to supplement their education financing needs when other forms of student aid, such as scholarships, grants and federal student loans, aren t enough to cover the full cost of education. 6

7 Private student loan options When looking at the Private Education Student Loan program options, there are important changes that students should know about. Changes to industry regulations in the private loan sector have lead to a competitive private loan market which has lead to better quality student loan products. Many lenders offer: Fixed and variable interest rate options No origination, disbursement or early repayment fees Interest rate discount opportunities that further lower the cost Deferred payment options during in-school periods Eligibility for full-time, half-time and less-than-half-time Loan forgiveness in the event of student s death or total permanent disability 7

8 Comparing Student Loans 8

9 How to Decide Factors to consider when exploring federal and private student loan options: Loan costs Repayment features To help you better understand the options available, here are some questions to ask yourself when comparing loans. 9

10 Cost Comparison When comparing the cost of student loans, students should ask: What is the interest rate? What is the APR? Are there any loan fees? Are there any interest rate or other discounts? What will the monthly payment be? What is the repayment term? 10

11 Repayment Comparison When considering repayment, students should ask: Will I be required to make payments while I am in school? Is there a grace period after graduation or after dropping enrollment below half-time? What types of discounts are available during repayment? How long is the repayment term? Who will service my loans? Are there deferment or forbearance options? Are there different repayment options? Is there a cosigner release option? Is there loan forgiveness? 11

12 Cost Comparison Private education student loans are sometimes the lowest-cost option. When you factor in a good credit standing, choice of interest rate, and potential discounts provided, private student loans are very competitive, and may be the lowest-cost option among private and federal student loans for many families. 12

13 Competitive Options 19.6% of the population has a credit score of * 18.1% of the population has a credit score of * Borrowers or cosigners with the above credit scores may qualify for a private student loan that s priced more favorably than a federal student loan. *Source: FICO Banking Analytics Blog at bankinganalyticsblog.fico.com/2011/09/fico-scores-shift-during-recession.html 13

14 Students can shop around Students should make an informed decision before deciding on a loan. There is no down side to shopping around. Applying for a private student loan does not impact their eligibility for a Direct PLUS Loan or a Direct PLUS Loan for Graduate and Professional Students Applying for multiple credit-based student loans (rate shopping) in a 30-day window is treated as one inquiry when determining a credit score * * Source: myfico.com 14

15 Understanding Credit Evaluations What do lenders look for during credit evaluation? 1. Credit refers to the borrower s ability to manage debt and evaluates their history of repaying their obligations 2. Capacity is the borrower s ability to pay his or her obligations 3. Capital (cash) refers to the borrower s financial resources and strengths 4. Collateral is security for a loan 15

16 Understanding Credit Evaluation You may use the following categories as a general guideline in evaluating your own creditworthiness. A credit report will be used to review your credit history and determine creditworthiness. Excellent credit rating You have an established and clean credit history (i.e. no late payments on any accounts, no tax liens, no previous bankruptcy or foreclosure) Good credit rating Your overall credit history is good, but you have one or two minor issues (e.g. one 30 day late payment on a credit card or too many credit cards near the limit) Average Credit Rating If you have had a few credit issues in the past 16

17 Private Education Loan Cosigners Many private student loan applicants will need a cosigner in order to qualify, especially undergraduates or students who don t have a steady income or credit history. Having a cosigner may help Chances for loan approval Secure a lower interest rate Speed up the credit decision process. The cosigner is required to sign the loan document. The cosigner agrees to be equally responsible for repaying the loan. 17

18 Private Education Loan Cosigners Often a lender will require a borrower to have an established and positive credit history, acceptable debt-to-income ratio, and minimum income to qualify for a private student loan. Because of these eligibility requirements, most students will need a cosigner in order to qualify. Who can be a cosigner? Any adult who meets certain credit and citizenship requirements Does not have to be a relative Anyone who meets the general eligibility requirements What are the responsibilities of a cosigner? As a cosigner, equal responsibility is assumed for repaying the loan. The loan obligation becomes part of the cosigner s credit history, including any late payments to the account. Many Private Education Loan Lenders have a co-signer release option. 18

19 Rate Choice Many private loan lenders are now providing the choice of fixed and variable interest rates: Fixed interest rates are based on market conditions Variable interest rates are based on two factors: The Index (Prime Rate or Libor) which can go up or down depending on market conditions, and; The margin, which does not change Rates are currently at historic lows and the Federal Reserve stated the federal funds rate is not expected to increase at least through late * *Source: Federal Reserve at federalreserve.gov/newsevents/press/monetary/ a.htm 19

20 Prime vs. Libor Interest Rates Prime- Prime rate is the interest rate which often serves as a benchmark or index percentage rate. The Prime rate tends to be about 3% above the Federal Funds Rate set by the Federal Reserve, and can go up or down over time. Publications may refer to the Wall Street Journal Prime Rate or the WSJ Prime Rate in addition to "Prime Rate". Libor- London Interbank Offered Rate - Interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market (or Interbank Market) Spread between Prime and Libor is historically very consistent ~3% Updates are posted in the Wall Street Journal Money Rates table 20

21 Interest Rates Interest Capitalization Any time all accrued, unpaid interest and loan fees are added to the outstanding principal balance of a loan. The more frequently a lender adds the interest to the principal loan balance, the more interest a borrower will pay. Depending on the terms of your loan, capitalization may occur throughout repayment or as result of the following: once, prior to repayment; after periods of deferment and/or forbearance; on a regular schedule, such as annually. 21

22 Interest Rates Annual Percentage Rate (APR) The annual cost of your loan, including the interest rate and certain fees With student loans, two major things will cause the APR to be different than the interest rate, origination fees and deferment periods. Origination fees A processing fee charged by the lender at the time of origination. Some lenders net the fee from the disbursed funds and some add it to the loan balance. Deferment periods During a deferment period you re not making payments on your loan, for most the loan is deferred while in school and during the grace period. Origination fees can cause the APR to be higher than the interest rate. Why? The APR is calculated under the assumption that the fee is a cost to the loan. Deferment periods can cause the APR to be lower than the interest rate. Why? The APR is calculated under the assumption that interest is capitalized (added to the principle balance). However, many lenders do not capitalize the interest for their student loans during in-school and grace periods. Therefore, if you have a loan with a deferment period, the APR goes down. 22

23 Interest Rates Annual Percentage Rate (APR) examples Example 1: interest rate of 6.80% on a $10,000 loan with a 4% origination fee and no in-school deferment. Therefore the APR is 7.72% which is higher than the interest rate. Example 2: interest rate of 6.80% on a $10,000 loan with no origination fee. In addition, the loan has an in-school deferment, therefore the APR is 6.62% - which is lower than the interest rate. Example 3: interest rate of 6.80% on a $10,000 loan with a 4% origination fee. In addition, the loan has an in-school deferment, therefore the APR is 7.21% which ends up lower than the interest rate. Example 4: interest rate of 6.80% on a $10,000 loan with no origination fee, and no deferment period. The APR is the same as the interest rate. Example Interest Rate Origination Fees Example 23 Deferment Period APR Repayment Period 1 6.8% 4% 0 months 7.72% 10 years 2 6.8% 0% 30 months 6.62% 10 years 3 6.8% 4% 30 months 7.21% 10 years 4 6.8% 0% 0 months 6.8% 10 years

24 Repayment Plans for Private Student Loans Options often provided: Standard Repayment- Pay a set amount each month until the loans are paid in full. The standard plan is most often used by borrowers. Fully Deferred Both principal and interest deferred for set amount of time from the date of the first disbursement of the loan while the student remains enrolled in school. Repayment of principal and interest begin once student has left an eligible program. Interest Only Repayment Interest payments begin after the first disbursement, principal payments are deferred while enrolled. Repayment of principal and interest begin once student has left an eligible program. Partial Interest Repayment Small, fixed monthly partial interest payment while in school. The fixed monthly payment (often $25) begins after the first disbursement, principal payments are deferred while enrolled. Repayment of principal and interest begin once student has left an eligible program. Any unpaid accrued interest is capitalized to the loan balance at repayment. 24

25 Student Loan Repayment Scenarios So how do you figure out what a reasonable monthly payment would be? Find your estimated income information at the Bureau of Labor Statistics: bls.gov. To figure your monthly income, reduce your gross income by 15% for taxes, then divide by 12. Take your monthly income times 10% to see what a reasonable monthly payment would be. 25

26 Student Loan Repayment Scenarios Registered Nurse Anticipated median income: $66,530 She borrows $20,000 in federal loans and $15,000 in private loans to get her undergraduate degree. Her payments total $ once she s out of school. This is well within 10% of her monthly income. Social Worker Anticipated median income: $43,120 He borrows $27,000 in federal loans and $20,000 in private loans to get his undergraduate degree. His payments total $ once he s out of school. This equals about 16% of his monthly income, and he may struggle to afford his payments. The private loan repayment estimates are based on 7.00% interest rate with no origination, disbursement, or repayment fees, on a 15 year term. The federal loan estimates are based on 6.80% interest rate on a 10 year term. For both calculations, they do not include any accumulated interest during an in-school deferment period 26

27 The Role of the School 27

28 The school s part in the process Presenting of Lender Information: No List, Historical List or Preferred Lender Arrangement Completing of School Certification: Direct with each Lender via on-line or fax, On-Line Commonline Option for multiple lenders Receiving Funds Disbursement: Direct funding options with each lender Options are available for Electronic Funds Transfer with multiple lenders 28

29 Questions? 29

30 Thank you for your time today! 30

31 Private Student Loans 101 Evaluation System APP or Web Enter Poll ID Enter Password sasfaa 31

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