dennis zanchi dzanchi@edfund.org. 2 agenda private loans ◦ defined ◦ interest rates ◦ indexes...

Dennis Zanchidzanchi@edfund.org

2

Agenda

Private loans◦ Defined

◦ Interest rates

◦ Indexes

◦ Finding the best deal

Federal loans◦ Defined◦ Industry players

All loans◦ Rights comparison

◦ Term definitions

◦ Loan repayment chart

Loan comparisons

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Private education loans Private loans Alternative loans Non-federal loans

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Interest Rate

Private

Federal

PLUS

Fixed rate No Yes Yes

Maximum rate

25%+ 6.8%8.25%

8.5%

9.0%

Rate will change

Yes No No

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Cost of funds

+ Operations

+ Inflation

+ Risk

+ Profit

Borrower rate

Private Loan Interest Rate

Index

Margin

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Dissecting an Interest Rate

1,4,5 Bank sample June 2006 2Federal Reserve 3Federal Reserve Bank Functional Cost and Profit Analysis.

Credit Card

Cost of Funds1 2.38%

Inflation Rate2 2.50%

Operations3 0.50%

Loan Losses4 4.85%

Total Lender Cost 10.23%

Profit 2.94%

Loan Rate5 13.17%

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Index Types

Index and borrower rate Treasury bill LIBOR Prime rate

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T-Bill

Treasury bill Government borrowing

◦ U.S. deficit

◦ Rate set by the government

◦ Price it will pay to borrow money

Terms: 13 and 26 weeks

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LIBOR

London Interbank Offered Rate◦ Rate international banks in London charge

each other for loans

◦ Can take place anywhere

◦ Recorded in London

◦ Similar to NYSE

Index has been used for 18 years

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Prime Rate

Retail◦ Credit-worthy customers

Secured

Private loans◦ Wholesale price

◦ Mark-up/margin added Borrowers lack credit history Unsecured

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Margin

Allowance to cover expenses◦ Rate the borrower pays 10%

◦ Index (cost of funds) -4%

◦ Margin (covers expenses) 6%

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The Right Choice

? LIBOR Prime rate T-Bill

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Indexes Mirror Each Other

Source: St. Louis Federal Reserve Bank and Federal National Mortgage Association

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Rates Mirror Each Other

Margin compensates for index variety

Any index+ Margin

= Similar loan rates

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Variable Rate Payment Risk

Based on a 10-year loan term.

Loan Amount $20,000

Loan Rate 5.00%

Cap 25.00%

Payment Range $212 - $455

Possible Increase 115%

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Private Loan Choices

Lender Index Margin CapCurrentRate Fees Term

# 1 LIBOR 5.00% None 10.36% 4.00% 15

# 1 LIBOR 5.00% None 10.36% 6.25% 15

# 2 PRIME 0.50% None 8.75% 0% 15

# 2 PRIME 4.75% None 13.00% 0% 15

# 3 PRIME 1.00% None 9.25% 0% 15

# 3 PRIME 1.00% None 9.25% 3% 15

# 4 LIBOR 4.50% None 9.86% 2% 15

# 4 LIBOR 4.50% None 9.86% 9.90% 15

# 4 LIBOR 5.50% None 10.86% 2% 15

# 4 LIBOR 5.50% None 10.86% 9.90% 15

# 5 LIBOR 1.60% 12.00% 6.96% 3.75% 15

# 5 LIBOR 1.60% 12.00% 6.96% 7.00% 15

# 5 LIBOR 2.80% 12.00% 8.16% 3.75% 15

# 5 LIBOR 2.80% 12.00% 8.16% 7.00% 15

# 5 PRIME 0.00% 12.00% 8.25% 3.75% 15

# 5 PRIME 0.00% 12.00% 8.25% 7.00% 15

# 6 PRIME 0.00% None 8.25% 0% 15

# 6 PRIME 0.00% None 8.25% 9% 15

# 6 PRIME 5.00% None 13.25% 0% 15

# 6 PRIME 5.00% None 13.25% 9% 15

# 7 LIBOR 2.25% None 7.61% 0% 15

# 7 LIBOR 2.25% None 7.61% 8% 15

# 7 LIBOR 8.00% None 13.36% 0% 15

# 7 LIBOR 8.00% None 13.36% 8% 15

# 8 LIBOR 4.00% 18.00% 9.36% 0% 15

# 9 PRIME 6.50% None 14.75% 0% 15

# 9 PRIME 6.50% None 14.75% 3% 15

# 10 PRIME 4.50% None 12.75% 0% 15

# 10 PRIME 7.75% None 16.00% 0% 15

Lender Index Margin CapCurrentRate Fees Term

A LIBOR 1.00% None 6.36% 0% 20

A LIBOR 1.00% None 6.36% 8% 20

A LIBOR 2.75% None 8.11% 0% 20

A LIBOR 2.75% None 8.11% 8% 20

B PRIME -0.50% None 7.75% 0% 20

B PRIME -0.50% None 7.75% 9% 20

C LIBOR 3.75% None 9.11% 0% 20

C LIBOR 3.75% None 9.11% 7% 20

D PRIME 0.00% None 8.25% 0% 20

D PRIME 4.50% None 12.75% 0% 20

E LIBOR 0.00% None 5.36% 6.50% 20

E LIBOR 0.00% None 5.36% 10.50% 20

E LIBOR 3.50% None 8.86% 6.50% 20

E LIBOR 3.50% None 8.86% 10.50% 20

F LIBOR 3.85% None 9.21% 2% 20

G 3 Mo T-Bill 3.40% None 8.01% 6.50% 20

G 3 Mo T-Bill 3.40% None 8.01% 8.00% 20

H PRIME 1.25% None 9.50% 0% 20

H PRIME 1.25% None 9.50% 8% 20

H PRIME 2.25% None 10.50% 0% 20

H PRIME 2.25% None 10.50% 8% 20

I LIBOR 1.80% None 7.16% 0% 20

I LIBOR 1.80% None 7.16% 9% 20

J LIBOR 7.50% None 12.86% 0% 20

J LIBOR 7.50% None 12.86% 9% 20

K LIBOR 4.25% None 9.61% 2% 20

K LIBOR 4.25% None 9.61% 9% 20

K LIBOR 9.95% None 15.31% 2% 20

K LIBOR 9.95% None 15.31% 9% 20

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Finding the Best Deal

Private education loan criteria◦ Homes, cars, credit cards, etc.

◦ Most creditworthy = lower loan rate

◦ Least creditworthy = higher loan rate

Student loan criteria

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How to Find the Best Deal

Recommend federal loans first◦ Fixed rate◦ Multiple repayment options

Separate private loans by term Sort by rate Divide into three sections

◦ Best credit◦ Average credit◦ Poor credit

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Private Loan ChoicesLender Index Margin Cap

CurrentRate Fees Term

# 1 LIBOR 5.00% None 10.36% 4.00% 15

# 1 LIBOR 5.00% None 10.36% 6.25% 15

# 2 PRIME 0.50% None 8.75% 0% 15

# 2 PRIME 4.75% None 13.00% 0% 15

# 3 PRIME 1.00% None 9.25% 0% 15

# 3 PRIME 1.00% None 9.25% 3% 15

# 4 LIBOR 4.50% None 9.86% 2% 15

# 4 LIBOR 4.50% None 9.86% 9.90% 15

# 4 LIBOR 5.50% None 10.86% 2% 15

# 4 LIBOR 5.50% None 10.86% 9.90% 15

# 5 LIBOR 1.60% 12.00% 6.96% 3.75% 15

# 5 LIBOR 1.60% 12.00% 6.96% 7.00% 15

# 5 LIBOR 2.80% 12.00% 8.16% 3.75% 15

# 5 LIBOR 2.80% 12.00% 8.16% 7.00% 15

# 5 PRIME 0.00% 12.00% 8.25% 3.75% 15

# 5 PRIME 0.00% 12.00% 8.25% 7.00% 15

# 6 PRIME 0.00% None 8.25% 0% 15

# 6 PRIME 0.00% None 8.25% 9% 15

# 6 PRIME 5.00% None 13.25% 0% 15

# 6 PRIME 5.00% None 13.25% 9% 15

# 7 LIBOR 2.25% None 7.61% 0% 15

# 7 LIBOR 2.25% None 7.61% 8% 15

# 7 LIBOR 8.00% None 13.36% 0% 15

# 7 LIBOR 8.00% None 13.36% 8% 15

# 8 LIBOR 4.00% 18.00% 9.36% 0% 15

# 9 PRIME 6.50% None 14.75% 0% 15

# 9 PRIME 6.50% None 14.75% 3% 15

# 10 PRIME 4.50% None 12.75% 0% 15

# 10 PRIME 7.75% None 16.00% 0% 15

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Lender Guidelines

Low cohort default rate Credit worthiness Graduation rate

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Federal education loans◦Perkins◦GradPlus loans◦PLUS loan◦Stafford

Stafford loans◦Subsidized◦Unsubsidized

Financial aid office

Federal

government

Lender

Servicer

Secondary market

Guarantor

Credit bureaus◦ Experian◦ Equifax◦ TransUnion

Ombudsman ◦ 1.877.557.2575◦ www.ombudsman.ed

.gov NSLDS

◦ www.nslds.ed.gov

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Federal loans◦ Fixed rate 6.80% for loans on or after 7/1/06◦ Interest rate cap 8.25% for loans before 7/1/06◦ 2% upfront origination and default fees

PLUS loans◦ Fixed rate 9.0% for loans on or after 7/1/06◦ Interest rate cap 8.5% for loans before 7/1/06◦ 4% upfront origination and default fees

Private loans◦ Variable rates up to 25% or more◦ 12% or more upfront origination and other fees

Monthly payment amount based on a 10 year repayment term.

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Amortization

Applies to all private and federal loans◦ Amortize = Pay off

◦ Reduction of debt with regular payments of Interest (cost of the loan) Principal (actual amount borrowed)

◦ Result = Loan balance decreases

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Negative Amortization

Increasing debt Payments do not cover principal and interest

Result = Loan balance grows Read the fine print Monthly payments remain fixed throughout the

life of the loan. Any fluctuation in the interest rate will be reflected in the length of repayment, not in the monthly amount.

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Capitalization

Adding interest to loan balance Capital = Money borrowed Interest is paid on capital “Capitalized” = when interest becomes

part of the capital

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Receive a copy of signed MPN Receive a disclosure statement Receive a six-month grace period Prepay all or part of loan without penalty Deferments & forbearance, if eligible Written notice if loan is sold Proof of discharge after repaying loan in full

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Required◦ Receive a copy of signed documents◦ Receive a disclosure statement◦ Written notice if loan is sold◦ Proof of discharge after repaying loan in full

Not required◦ Prepayment without penalty in most cases◦ To provide annual percentage rate (APR)◦ Grace period ◦ Forbearance or deferment

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All loans◦Full amount due - including collection costs◦ Credit will be damaged◦ May lose eligibility for federal or state jobs

Federal loans◦Subject to federal and state offsets –tax

refunds◦Lose deferment and forbearance options◦Lose eligibility for future financial aid◦May lose professional license

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What Is A Good Deal?

Affordable payment◦ Fits in student’s budget

Competitive rate Reasonable fees Understanding the transaction Feeling like you got a fair deal

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Federal and Private Loans

*Only in extreme hardship will federal loans be discharged. PLUS loans do not have forgiveness options.

Private FederalFixed rate/max rate No Yes

Fees & interest Unregulated Regulated

Subsidized interest No Possible

Dischargeable* No No

Repayment options Limited 5 options

Postponement Unlikely Yes

Forgiveness options No Yes*

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Private and Federal Loans

* CDR is Cohort Default Rate. Offset is the ability for a guarantor to take tax refunds.

Private FederalLoan education Possible Required

(Not for PLUS)

Impacts CDR No Yes

Subject to offset No Yes

Garnish wages Yes Yes

Annual limits No Yes

Tax benefits Yes Yes

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Private and Federal Loans

Private Federal PLUSOmbudsman No Yes Yes

Requires good credit Yes No Yes

Cosigner Possible No Possible

Incentives Yes Yes No

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Questions