Understanding Private Loans. Default Prevention. Essential loan language Variable rate language Types of indexes Language for all types of loans Dissect an interest rate Variable rate history Finding the best deal. Agenda. Improve discussion with borrowers
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Variable rate language
Types of indexes
Language for all types of loans
Dissect an interest rate
Variable rate history
Finding the best dealAgenda
Better understanding of loans and terms
Less stressWhat’s In It For You?
Review the FAFSA, determine EFC, then send the AL through your FAM system.
Is your school Direct or FFEL?
Do you process EFT through ELM?
Do you award FWS, Pell and FSEOG?Know Another Language?
Shown as a percent of borrowed amount
One of many ways to charge for a loan
Capitalization frequencyInterest Rate
Student loans — monthly
Credit cards — daily or monthly
Earlier payments = less interest
How payment is applied
Lowest interest rate balance
Higher interest rate balance
Education loanInterest Rates and Debt
Cost of funds
1,4,5 Bank sample June 20062Federal Reserve 3Federal Reserve Bank Functional Cost and Profit Analysis.
Can make shopping easier
Prime rateIndex Types
Rate = price lender pays for money
Name = where lender obtains money
Price borrower pays for moneyIndex
Rate set by the government
Price it will pay to borrow money
Terms: 13 and 26 weeksT-Bill
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 yearsLIBOR
Borrowers lack credit history
Rate the borrower pays 10%
Index (cost of funds) -4%
Margin (covers expenses) 6%Margin
What the customer paysIndex + Margin
Limits consumer risk
Also called ceilingFloor and Cap
If prime rate is 14% + 3% margin
Rate is ____%Cap Example
Annually, quarterly, monthly
Keeps lender’s margin/markup levelAdjustment Period
Limits borrower risk
Easier to budget
Benefit when rates are going up
Not a benefit when rates declineAdjustment Period Cap
Based on a 10-year loan term.
Usually a percentage of the loan amount
Fee to start a loan
Adds to the total cost of the loan
Included in APRLoan Origination Fees
One point = 1%
Origination fee of 2%
$25,000 x 2 points = $500
Mortgage, home equity
Reduction of debt
Regular payments of
Interest (cost of the loan)
Principal (actual amount borrowed)
Result = Loan balance decreasesAmortization
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.Negative Amortization
Capital = Money borrowed
Interest is paid on capital
“Capitalized” = when interest becomes part of the capitalCapitalization
$10,000 loan with 10-year term
1% fee = $100
1% rate discount = $626
A lower rate saves more than a low fee
Similar to car loanWhat’s a Better Deal?
$626 savings based on an interest rate comparison of 7% and 8% on a 10-year loan term.
T-BillThe Right Choice
Source: St. Louis Federal Reserve Bank and Federal National Mortgage Association
= Similar loan ratesRates Mirror Each Other
Identify loan choices
Interest rate index
Up front costs
Points, fees, etc.
Total cost of loan
Principal, interest, feesComparison Shopping
Fits in your budget
Feeling like you got a fair dealWhat is a Good Deal?
Homes, cars, credit cards, etc.
Most creditworthy = lower loan rate
Least creditworthy = higher loan rate
Private student loansFinding the Best Deal
Sort by rate
Divide into three sections
Poor creditHow to Find the Best Deal
Rates typically mirror each other
Prepare for payment to change
Pay off higher interest rate debt
Private loans (if rate goes up)
Deferment/forbearance optionsGuiding Students
2. Types of indexes
3. Language for all types of loans
4. What is a good deal?
5. Guiding studentsConclusion