GAP FINANCING OPTIONS & PRIVATE LOANS 2016 OASFAA Conference Raymond Yee Director, Business Development
FACTORS IMPACTING HIGHER EDUCATION
3 Trends Likely to Shape Student Aid Continued rising cost of attendance President s proposal on free community college Decline in availability of non-federal sources of funding Continued pressure on in state and institutional funding due to budget constraints Changes to PLUS loan eligibility and appeals process Flat/declining enrollment on many campuses Improving economy has resulted in a decline in people going back to school
4 Legislative / Regulatory Issues Higher Education Act (HEA) up for reauthorization Expired in October 2013; but extended on year-by-year basis 2014: Hearings and proposals 2015: More hearings, possible legislative action Major themes of reauthorization Simplification of federal loan programs Fewer loan types, streamline interest rates & repayment options College cost and school eligibility Gainful employment and measuring school effectiveness Skin in the game accountability for federal aid Consumer protections Information and disclosures Ability to refinance loans; discharge in bankruptcy Servicing and collections requirements
5 College Costs Continue to Increase SOURCE: College Board Trends in College Pricing 2014.
6 Students Are Taking Primary Responsibility for Borrowing Proportion who borrow within families who borrow Students: 72% Parents: 28% Students signed for nearly three-quarters of the dollars borrowed Proportion of Students Who Borrowed 2014-15, by Loan Type Source: Sallie Mae (with Ipsos Public Affairs); How America Pays for College, 2015
1-2-3 Approach to Paying for College 1 Start with money you do not have to repay. This can include scholarships, grants and work study. 2 Explore federal education loans. Apply by completing the FAFSA 3 Consider filling in the gap with a responsible private education loan.
Scholarships Resources Private Resources KFC Scholarships Coca-Cola Scholarships Wal-Mart Scholarships Exxon Mobil Scholarship Ronald McDonald House Charities Scholarships Examples of Free Search Engines General Electric Foundation Scholarships Target Scholarships Scholarship America AT&T Labs Fellowship Program Scholarship Search by Sallie Mae provides free access to more than 5 million scholarships worth up to $24 billion SallieMae.com/ScholarshipSearch Fastweb features over 1.5 million scholarships worth up to $3.4 billion Fastweb.com/college-scholarships Big Future by the College Board offers scholarships, other financial aid and internships from more than 2,200 programs, totaling nearly $6 billion bigfuture.collegeboard.org/scholarship-search
Parent or Student Income: Tuition Payment Plans Most colleges and universities offer tuition payment plans Allows parents and students to pay their tuition in manageable monthly payments using their income Tuition payment plans help attract and retain students by giving them an additional funding solution Provides an interest free funding option
Federal Loan Options for Undergraduate Students Direct Loans Subsidized Government pays the interest during school, grace and authorized deferment periods Unsubsidized Borrower is responsible for interest at all times, but not required to pay it during school, grace and deferment Other loans: PLUS Loan for Parents AY 15/16 undergraduate interest rates and fees Direct Loans Subsidized Student Loan (only undergraduate students): 4.29% fixed (1.073% fee changes to 1.068% on 10/1/15) Unsubsidized Student Loan: 4.29% fixed (1.073% fee changes to 1.068% on 10/1/15) PLUS: 6.84% fixed (4.292% fee - changes to 4.272% starting 10/1/15)
Commonly Used Gap Financing Tools 401(k) Plans Long-Term Investments Home Equity Loans/Lines of Credit Credit Cards Federal Parent PLUS Loans Private Student Loans
Tapping 401(k) Plans Often addressed in the media, but parents still dip into their retirement funds to help pay for college Withdrawals are worse than loans, but both can significantly reduce retirement income Pros: Easy to access funds, no credit check or lengthy application process Cons: Double taxation, extra penalty for early withdrawals; lost investment growth = reduced retirement income Rule of Thumb: You can borrow for college, but you can t borrow for retirement!
Long-Term Investments (Mutual Funds, Stock, Bonds) Pulling funds out of investments is another option parents leverage to pay for college without borrowing As with 401(k), parent controls the use of funds Depending on economic circumstances, investments may be sold at a loss Some families intend long-term investments to supplement retirement income in the future Lost future investment growth
Home Equity Loans or Lines of Credit Home equity loans have tax benefits Parents also like that they are in control of the funds, not the student Foreclosure risk if financial situation changes drastically, such as job loss May need equity for future home improvements/repairs If you sell your home, you will have to pay back the loan Closing costs and other fees
Credit Cards Credit cards are probably the most expensive way to help pay for college Interest compounds monthly Special intro-rate offers are limited time Funds are easy to access, particularly when unexpected expenses come up (food/meal plan, books, laptop ) Credit cards also have a limit and using up the credit limit will show on credit reports Many schools assess a fee for paying with a credit card
Federal Parent PLUS Loans Some parents like the idea of taking out a loan in their own name but many expect the student to help pay it back 75% of parents state that the student is jointly responsible for paying back the PLUS loan Only 12% intend to pay the loan back without student involvement Cannot be transferred to student PLUS loan has a 6.84% fixed interest rate, and a 4.292% fee (Note: the fee will change to 4.272% on October 1) Can cover the gap, up to 100% of certified cost of attendance Option to defer payments while student is in school
17 Private Loan Trends Some lenders are offering fixed rates as good or better than PLUS loans to highly qualified graduate students Some students are seeking out private loans in order to take advantage of the loan rates Private parent loans are becoming more and more common Schools are becoming concerned about debt in the student s name Cosigner release is becoming more of a topic of conversation Death and disability discharge Families are becoming concerned about using 401K funds to pay for their child s education Some lenders have programs available for cohorts of students not eligible for federal programs Less-than- half-time students Prior term balances Continuing education Students are looking for ways to refinance their loans through consolidation
Private Student Loans Can be shared responsibility if parent cosigns Can help student build credit especially if scheduled to make payments while in school Covers gap of up to 100% of the school certified cost of attendance Terms and costs vary widely between lenders Option to defer payments while student is in school Note: for parents who want to take responsibility for financing their child s education, a private parent loan may be a good option.
Side-by-Side Comparison Federal PLUS Loan for Parents Federal PLUS Loan for Graduate Students Private Student Loans Issuer Federal government Federal government Financial institutions, such as banks or credit unions Name on the loan Parent Student Student and cosigner (if applicable) Approval requirements Parent or endorser must not have an adverse credit history Student or endorser must not have an adverse credit history Generally based on the creditworthiness of the borrower and/or cosigner Require FAFSA Yes Yes No Choice of interest rates Fixed rate only Fixed rate only In many cases, both variable and fixed rates are available Fees Cosigner Release 4.292% for loans first disbursed on or after October 1, 2014 and before October 1, 2015. 4.272% for loans first disbursed on or after October 1, 2015 and before October 1, 2016. No, the parent, and any endorser, has a commitment to repay the loan for the life of the loan 4.292% for loans first disbursed on or after 10/1/14 and before 10/1/15. 4.272% for loans first disbursed on or after 10/1/15 and before 10/1/16. No, the student, and any endorser, has a commitment to repay the loan for the life of the loan Generally no origination / disbursement fees Many lenders provide a cosigner release option where a student can apply to release the cosigner after he or she graduates, makes a specified number of on-time payments, and meets underwriting requirements * Interest rates, fees, terms, and borrower benefits based on a July 2015 review of national school- certified private loan programs
5 Key Things to Consider When Shopping for Private Loans 1. How much should I borrow? Sallie Mae recommends that you carefully consider your personal financial situation, including expected annual starting salary and total debt load, when evaluating the amount of student loans to borrow. Guidance from the College Board suggests that new graduate's monthly student loan payments should be no more than 10% to 15% of starting monthly salary. Expected Starting Salary $4,000/month (pre-tax) Guidance on borrowed $ s Monthly payment = $400 or less 2. Interest rate fixed or variable? a) Fixed Rate = Stability, but often more expensive b) Variable Rate = Can be cheaper, especially short term
5 Key Things to Consider When Shopping for Private Loans 3. Repayment Options a) In school payments may: build credit by making scheduled monthly payments on time reduce capitalized interest (interest added to a loan s principal balance) lower total loan cost b) Deferred payments may: allow for more flexibility while in school increase the total loan cost due to capitalized interest EXAMPLE: $10,000 loan, 8% Interest Rate, 4 years in school, 10-year term In-School Repayment Option In-School Monthly Payment Post-School Payment Post School Payment Terms (months) Total Amount Paid Deferred Repayment Option $0 $141.90 144 $20,405.41 Interest Repayment Option $56.88 $156.68 84 $15,651.13
5 Key Things to Consider When Shopping for Private Loans 4. Benefit programs offered by the lender a) Rewards for certain activities (paying via ACH, graduating from school) b) Rewards for on-time payments 5. Other features of the loan a) Repayment term b) Cosigner release c) Death & disability waivers, tuition insurance
Conclusion Many financing vehicles are available to families While there is no one-size-fits-all solution, families should follow the 1-2-3 approach: Start with money you do not have to repay. This can include scholarships, grants and work study. Explore federal education loans. Apply by completing the FAFSA Consider filling in the gap with a responsible private education loan. Some tools families are using are not ideal solutions When considering a private loan, families should research their options first
Questions?
The information contained in this presentation is not comprehensive, is subject to constant change, and therefore should serve only as general, background information for further investigation and study related to the subject matter and the specific factual circumstances being considered or evaluated. Nothing in this presentation constitutes or is designed to constitute legal advice.