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HESC Symposium Unlocking the Mysteries of Private Student Loans

HESC Symposium Unlocking the Mysteries of Private Student Loans. This presentation does not constitute formal policy or legal advice and should not be relied upon as such. Unlocking the Mysteries of Private Student Loans Agenda. What is the current state of the private student loan market?

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HESC Symposium Unlocking the Mysteries of Private Student Loans

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  1. HESC SymposiumUnlocking the Mysteries of Private Student Loans This presentation does not constitute formal policy or legal advice and should not be relied upon as such.

  2. Unlocking the Mysteries of Private Student Loans Agenda • What is the current state of the private student loan market? • How are schools addressing this shortfall in private student loans? • How can financial aid staff inform and educate students about private student loans? • How will the regulatory environment impact private loan disclosure in the future? • What is the outlook for 2009-10 and beyond?

  3. Unlocking the Mysteries of Private Student LoansGrowth in Private Student Loans Source: College Board Trends in Student Aid, 2007-08

  4. Unlocking the Mysteries of Private Student Loans The Difference That Two Years Makes Sources: College Board data used for 2007 Loan Volumes and SLA estimates for 2009 Loan Volume estimates, reviewed securitization prospectus for Loan Margins, DBRS research for Quarterly Gross Defaults

  5. Unlocking the Mysteries of Private Student Loans Lender List Penetration Rates Source: SLA Analysis of 425 private loan lender lists, August 2009

  6. Unlocking the Mysteries of Private Student Loans Interest Rate Ranges For Major Lenders Fees None None 0% to 6% 0% to 6% None None 0% to 6% 0% to 5% Source: SLA analysis of repayment examples on lender websites, September 2009

  7. Unlocking the Mysteries of Private Student Loans Interest Rate Distribution in Private Loan Securitization Source: SLM Private Credit Student Loan Trust 2007-A, March 2007

  8. Unlocking the Mysteries of Private Student LoansRecent Changes to Private Loan Margins

  9. Unlocking the Mysteries of Private Student Loans Customized Pricing: Chase Select Loans 2007 Cohort Default Rate: 0.7% 1.2% 2.0% 2.0% Source: SLA Analysis of lender lists at these institutions, September 2009

  10. Unlocking the Mysteries of Private Student LoansWhat About Credit Unions? • Credit Union Student Choice • Network of over 80 credit unions nationwide • Variable-rate loans usually based on one-month LIBOR • Average funded rate of 5.8% with no origination fees • Structured as credit line • Loan limits up to $75,000 • Requires membership in credit union to apply • Cosigner recommended • Individual credit unions in college towns often provide competitive student loans and transparent disclosures too • University of Southern California Credit Union (3.3% to 6.8%) • University of Wisconsin Credit Union (4.0% to 9.5%) • University Credit Union serving University of Maine system (3.25% to 7.75%) • Do not assume credit unions ALWAYS offer better rates and terms

  11. Unlocking the Mysteries of Private Student Loans Transparent Disclosures • University Credit Union (Maine) • University of Southern California Credit Union

  12. Unlocking the Mysteries of Private Student LoansState Alternative Loan Programs – Fixed Rate

  13. Unlocking the Mysteries of Private Student LoansState Alternative Loan Programs – Variable Rate

  14. Unlocking the Mysteries of Private Student LoansWhat Determines Pricing on Private Loans? • Competitive dynamics • Cost of capital • Availability of capital • Return expectations • Shareholders • Members • Default/Writeoff experience

  15. Unlocking the Mysteries of Private Student Loans Agenda • What is the current state of the private student loan market? • How are schools addressing this shortfall in private student loan capacity? • How can financial aid staff inform and educate students about private student loans? • How will the regulatory environment impact private loan disclosure in the future? • What is the outlook for 2009-10 and beyond?

  16. Unlocking the Mysteries of Private Student LoansLevel of Concern About Private Loan Availability Survey question: How concerned are you about the availability of PRIVATE loans for your students for the 2009-10 academic year? Source: SLA Flash Survey: Private Student Loans, June 2009 (187 respondents)

  17. Unlocking the Mysteries of Private Student LoansPerceived Availability of Private Loans Survey question: Please describe your impressions regarding private loan approval rates for your students today, as compared to a year ago. Source: SLA Flash Survey: Private Student Loans, June 2009 (187 respondents)

  18. Unlocking the Mysteries of Private Student Loans Strategies for Dealing with Private Loan Issues Survey question: What are your current strategies to help students find private, nonfederal loans for the 2009-10 school year? Source: SLA Flash Survey: Private Student Loans, June 2009 (187 respondents)

  19. Unlocking the Mysteries of Private Student Loans Strategies To Address Private Loan Shortfall • Cosigners • Increase odds for approval while ensuring best rate on the loans • Almost a requirement these days • Sallie Mae targeting 90% of loans to have cosigner • Wells Fargo recently eliminated credit-ready loans for juniors/seniors/ graduate students • Parent PLUS loans • Interestingly, PLUS loan volumes may not have increased despite easier credit terms and deferment option, which went into effect July 1, 2008 • FFEL PLUS Loans have denial rates 2X as high as DL PLUS (FinAid research) • Opportunity for additional unsubsidized Stafford if application turned down • Tuition repayment plans • Three major vendors: • FACTS/Nelnet Tuition Management (Nelnet) • Tuition Management Systems (Key Bank) • TuitionPay (Sallie Mae)

  20. Unlocking the Mysteries of Private Student Loans Prevalence of Private Loan Lender List Survey question: Is your institution planning to provide students with a lender list for private loans for the 2009-10 school year? Source: SLA Flash Survey: Private Student Loans, June 2009 (187 respondents)

  21. Unlocking the Mysteries of Private Student Loans Reasons Given For Not Providing Lender List Survey question: Please describe the importance of these factors in determining why your institution will not be providing students with a lender list for private student loans for the 2009-10 school year. Source: SLA Flash Survey: Private Student Loans, June 2009 (187 respondents)

  22. Unlocking the Mysteries of Private Student Loans Lender Selection Process for 2009-10 Survey question: Please describe your institution's process for developing a lender list for private student loans. Source: SLA Flash Survey: Private Student Loans, June 2009 (187 respondents)

  23. Unlocking the Mysteries of Private Student Loans Information Provided on Lender List Survey question: Describe the types of information that you will be providing about the lenders appearing on your institution's lender list for private loans. Source: SLA Flash Survey: Private Student Loans, June 2009 (187 respondents)

  24. Unlocking the Mysteries of Private Student Loans Will Multiple Applications Harm Your Credit Score? • Research shows that students spend more time researching federal loan options than private student loan options • New policy from Fair Isaac (FICO score) on student loan shopping • “In general, student loan shopping inquiries made during a focused time period (for example 30 days) will have little to no impact on your score.” • Advice from Fair Isaac on myfico.com site: • Doing a little homework first is always a good idea no matter what type of credit you're seeking. • You can generally avoid having those inquiries affect your score if you finish your rate shopping in a reasonable amount of time. • Then try to finish your rate shopping and finalize your loan within 30 days. • Not only will loan rates be easier to compare when the quotes come only a few days apart, but you also will protect your FICO score. SLA research found loan interest rates varied from 7% to 12% based on recent shopping of 6 major lenders

  25. Unlocking the Mysteries of Private Student Loans Agenda • What is the current state of the private student loan market? • How are schools addressing this shortfall in private student loan capacity? • How can financial aid staff inform and educate students to make good decisions about private student loans? • How will the regulatory environment impact private loan disclosure in the future? • What is the outlook for 2009-10 and beyond?

  26. Unlocking the Mysteries of Private Student Loans Who Is Taking Out Private Loans? Source: Project on Student Debt analysis of NPSAS data, August 2009

  27. Unlocking the Mysteries of Private Student Loans Borrowers Not Maximizing Stafford Loans 64% 48% Source: Project on Student Debt analysis of NPSAS data, August 2009

  28. Unlocking the Mysteries of Private Student LoansCounseling Topics Source: SLA Flash Survey on Financial Aid Counseling, July 2009

  29. Unlocking the Mysteries of Private Student LoansThe Purchasing Decision • Decision makers:  Parents of undergraduates • Federal funding options: Aware but confused • Rationale for choosing private loans: • Time constraints • Incomplete funding to cover all costs of education • Ineligibility for Federal aid • Sources for information about private loans: Rely heavily on schools • Importance of name recognition: Many chose based on this factor • Frequency of comparison shopping:  Many went with the first loan offered to them Source: Federal Reserve Consumer Research and Testing, 2009

  30. Unlocking the Mysteries of Private Student LoansThe Purchasing Decision • Focus on interest rates first • Factors that determine rates are important to consumers • Variable-rate nature of these loans worries consumers • Want to see historical rates so they have some context • Consumers want to see fees expressed in dollars and also want to understand rationale for fees also • Information about availability of federal loan alternatives was found to be useful • Understanding of basic loan terminology often confusing to consumers • Concept of loan margin • Many want to speak to a live person too Source: Federal Reserve Consumer Research and Testing, 2009

  31. Unlocking the Mysteries of Private Student Loans Calls To Lender Customer Service Centers • The Good… • “Gave great details on each program and recommended that I explore other lenders to find the right one for me.” • “Especially thorough about repayment information explaining exactly how that would work and when I would have to pay what.” • “A great CSR! Walked me through each loan slowly and carefully, making sure I understood all aspects.” • “Advised work study as an option.” • And Not So Good • “All but ignored federal loans, even when I mentioned that I had not yet used my Stafford loans.” • “Pushed me to begin the application over the phone immediately.” • “Really pushed the private loan. "What most college students go for.” • “Could not have wanted to get off the phone faster. Provided only the most basic information on topics.” Source: SLA Lender Call Center analysis, September 2009

  32. Unlocking the Mysteries of Private Student Loans Entrance Counseling for Private Loans • Take out federal loans before ever considering these “last resort” loans • Generally higher interest rates and less repayment flexibility than federal loans • Based on SLA research, the average private loan interest rate is 10%-11% • Cosigners almost always required • Know your interest rate before signing anything • Index (Prime or LIBOR) + Margin • Know that your interest rate will go up • Since 1990, 1 month LIBOR has ranged from 0.3% (current) to 9.125% (11/90) • “Tyranny of calculators” • Shop around! • SLA research in April 2009 found that for the same student and cosigner pairing that interest rates varied from 7% to 12%

  33. Unlocking the Mysteries of Private Student Loans Entrance Counseling for Private Loans • Study the details in the promissory note • Can the lender increase your interest rate if you are late with one payment? • How many days after the due date is a payment considered late? • What fees does the lender charge beyond the origination/repayment fee? • How frequently will your interest rate change? Monthly payment change? • Borrowers have option to cancel the loan • If you can pay interest only during while you are in school, DO IT! • It can save you thousands of dollars in loan repayment • Expand your alternatives by considering credit unions or state-run alternative loan programs • DO NOT take out a private loan if you can avoid it!

  34. Unlocking the Mysteries of Private Student Loans Exit Counseling for Private Student Loans • Congratulations on your upcoming graduation…now it is time to repay your student loans! • These loans will not go away if you don’t pay them • May not be dischargeable in bankruptcy • Stay with you even in death • Once you have settled down to your new address, notify your lender so coupon books/statements will reach you • Find your original paperwork, including your promissory note and Disclosure Statement • Contact lender if you can’t find it • Be pro-active with the borrower benefits that you were promised • Confirm the date that your first payment will be due • Typically have 6 month grace period after graduation

  35. Unlocking the Mysteries of Private Student Loans Exit Counseling for Private Student Loans • Do not be surprised that your current loan balance is higher than the amount of your original loan • If you are concerned about your ability to make payments on your loans, contact the lender immediately to discuss your options • Forbearance allows you to postpone payments • Your monthly payment will typically be adjusted quarterly or annually by the lender • Expect that interest rates and therefore your monthly payment will increase as the economy improves • Set up your monthly student loan payment on auto-pay • Earn a reduction in interest rates from 0.25% to 0.50% • Eliminate potential for late fees, which can run as high as $30 • If you are ready to pay down some extra principal, contact the lender in case you need to make any special notation on the payment

  36. Unlocking the Mysteries of Private Student Loans Agenda • What is the current state of the private student loan market? • How are schools addressing this shortfall in private student loan capacity? • How can financial aid staff inform and educate students to make good decisions about private student loans? • How will the regulatory environment impact private loan disclosure in the future? • What is the outlook for 2009-10 and beyond?

  37. Unlocking the Mysteries of Private Student Loans What Is a “Preferred Lender Arrangement”? • Definition of preferred lender arrangement (from HEOA) • Preferred lender arrangement.--The term `preferred lender arrangement'-- (A) means an arrangement or agreement between a lender and a covered institution or an institution- affiliated organization of such covered institution • (i) under which a lender provides or otherwise issues education loans to the students attending such covered institution or the families of such students; and • (ii) that relates to such covered institution or such institution-affiliated organization recommending, promoting, or endorsing the education loan products of the lender; NPRM: Lender list that does not have all lenders who lend to students at schools IS A “preferred lender arrangement”

  38. Unlocking the Mysteries of Private Student Loans What Are Requirements for A Preferred Lender List? • Web site • Publications • Mailings • Electronic messages • Materials that describe or discuss education loans

  39. Unlocking the Mysteries of Private Student Loans What Are Requirements If I Have A Preferred Lender List? • Describe method and criteria of selection which must be best in the best interest of borrowers • Indicate reasons why each lender was selected • Disclose that there is no requirement for borrower to choose lender on the preferred lender list • Must have minimum of two lenders on list and disclose any affiliate relationships • Exercise a duty of care and a duty of loyalty in compiling the list • Not less than the information required to be disclosed under section 153(a)(2)(A) • File an Annual Report

  40. Unlocking the Mysteries of Private Student Loans What If I Just Provide Information About Private Loans? • Model disclosure forms required under Truth-In-Lending Act • Lenders will provide • Information on availability of Title IV loans or other assistance • Statement to the effect that Title IV loan terms and conditions “may be more beneficial than those of private loans” • Provide information before students or families select a lender • Information must be provided in manner distinct from Title IV loans All of this information must be provided whether or not school has “preferred lender arrangement”

  41. Unlocking the Mysteries of Private Student Loans Regulation Z and Private Student Loan Disclosure • Federal Reserve provided final rules in July 2009 • Compliance Date: February 14, 2010 • Key regulations: • Consumer has thirty days after approval to decide whether to take loan • Consumer can cancel loan for up to three business days after consummation • Disclosure requirements • Application • Approval • After consumer accepts the loan • Borrower must complete self-certification form • Lender must have signed and completed form before consummating loan

  42. Unlocking the Mysteries of Private Student Loans Regulation Z Details • Exemptions • Extensions of credit with a term of 90 days or less (“emergency loans”) • Tuition billing plans • Interest rate not applied to balance • Term of less than a year • May be payable in more than four installments • Includes disclosure of private education loan discharge limitations in bankruptcy on application forms • Disclosure of federal loan options • “May be obtained in lieu of or in addition to private education loans” • “Federal Loan Alternatives” • Sets maximum rate at 25%, where one is not available • Co-branding prohibition and preferred lender lists • “[Name of loan] is not being offered or made by [school] but by [lender].”

  43. Unlocking the Mysteries of Private Student Loans Self-Certification Form • Lender must obtain from consumer a self-certification form before consummating the loan • Cost of attendance • Specific information about consumer’s other financial aid and need • May be provided to consumer in electronic format • Dept. of Education must develop the form • Form will include statement to the effect that “Consumer is encouraged to communicate with the financial aid office about the availability of other financial aid.” Final rule permits lenders to provide form directly to the consumer

  44. Unlocking the Mysteries of Private Student Loans Information from Preferred Lenders • Responsibility: Lenders must provide the general loan information required on the application form to the educational institution that it has a preferred lender arrangement with • Timing: April 1st of each calendar year or within 30 days of entering into a preferred lender arrangement • Period covered: Applies to loans that lender plans to offer from July 1 of current calendar year to June 30 of the next calendar year • Knowledge of preferred lender arrangement: Lender not required to comply if not aware that it is a party to preferred lender arrangement Financial Aid staff must contact lenders to receive model form

  45. Unlocking the Mysteries of Private Student Loans Disclosure Requirements: Application Process

  46. Unlocking the Mysteries of Private Student Loans Disclosure Requirements: Application Process

  47. Unlocking the Mysteries of Private Student Loans Disclosure Requirements: Application Process

  48. Unlocking the Mysteries of Private Student Loans ?????

  49. For more information about SLA and our Private Student Loan Ratings Service, please contact us at: Tim Ranzetta Student Lending Analytics LLC 650-218-8408 tranzetta@studentlendinganalytics.com www.studentlendinganalytics.com Student Lending AnalyticsContact Information

  50. Unlocking the Mysteries of Private Student Loans Student Lending Analytics: Resources Available • SLA Private Student Loan Ratings • 2009 SLA Private Loan Series • Ten part series on topics ranging from finding a cosigner to reading the promissory note • Student Lending Analytics Blog • Timely, insightful information about the student loan market • Private Loan Insight Survey • Student Satisfaction Surveys

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