Comparing AlternativeStudent Loans Presented By Leslie Mills, Bank of America Marcia Toomey, Endicott College Kristi Dunn, Suffolk University
Different strokes for different folks. I don’t care about the interest rate, I just want to get my money fast! I don’t care if it takes two months, I just want to get the best interest rate! All I care is that the monthly payments are the lowest possible! I don’t want to pay a fee! I’ll pay a fee if the interest rate is lower! I want it all!!!
So, what’s the best loan out there? 1. There’s no one easy answer. 2. There’s no magic formula.
Here are the apples to compare. 1. Interest Rates and their components 2. Fees 3. Interest Capitalization 4. Repayment Terms 5. Credit Criteria 6. Ease of loan process
Interest rates & their components. What base index is the interest rate tied to? What does the index history indicate? What is the spread/margin over the index? What’s the bottom line on the rate I’m paying? Will my spread remain constant over the life of the loan?
Current most prevalent indices in use today. • Prime Rate • LIBOR
Interest Rates & Spreads What base index is the interest rate tied to? What does the index history indicate?
Interest Rates & Spreads What base index is the interest rate tied to? What does the index history indicate? How is the actual interest rate calculated?
Interest Rate Calculations Examples Index + Spread = Interest Rate Prime 4.25 + 1.00 = 5.25% LIBOR 1.83 + 3.55 = 5.38%
Interest Rates & Spreads What base index is the interest rate tied to? What does the index history indicate? How is the actual interest rate calculated? Will my spread remain constant over the life of the loan? What’s the bottom line on the rate I’m paying?
Life of Loan Interest Principal at Monthly Total Index Rate Repayment Payments Payments Prime 5.75% $12,268 $102 $18,360 LIBOR 5.38% $12,123 $98 $17,640 Assumptions: $10K loan, 48mos deferred, 15yr amortization
Loan Fees • Don’t get trapped, make sure you understand the complete fee structure of the loan you will be using before you use it. • Up front fees can range from 0% - 16%. • Fees are sometimes charged when a loan goes into repayment and can range from 0% - 6.5%.
Interest Capitalization Don’t get bitten by capitalization. Make sure you understand what interest capitalization is and how it can be a positive or negative loan feature.
Questions to ask? Is interest capitalized annually or once at repayment? What interest rate will the capitalization be based on? If the loan contains a repayment fee will the fee calculation be inclusive or non-inclusive of any accrued interest that is to be capitalized? Can interest only payments be made during the in-school period?
Capitalization Table Examples Principal + Monthly Total Accrued Interest Payments Payments At Repayment $10,262 $112 $16,128 Interest $10,000 $83 $14,940 Payments Assumptions: $10K loan, 48mos deferred, 15yr amortization, 5.75% Int.
Repayment Terms Are there multiple repayment options? Are there prepayment penalties? Is there flexibility in the total years it will take to fully amortize the loan?
Repayment Table Assumptions: $10K loan, 48mos deferred, 5.75% interest rate
Credit Criteria • There’s no crystal credit ball. • Most lenders have fairly easy to follow credit criteria, you just need to take the time to understand it. • Typically, the easier it is to qualify, the more you’re going to pay in fees and interest.
What are the lenders looking for? • Willingness to repay: • Does the applicant have sufficient credit history? • Has current and previous credit been handled as agreed? • Do they meet the lenders bureau/credit score criteria? • Ability to repay: • Is the applicant employed and for how long? • Does their debt to income (DI) ratio reflect capacity to take on this debt?
The Loan Process • Is the application straight forward & easy to complete? • How long does it take to make a credit decision? • Are credit exceptions ever considered? • How long will it take to get a loan disbursed? • Will the lender ever work outside of their box? • Is the lender easy or difficult to deal with? • Can I talk to a real person?
Summing It Up • Know what’s important to you and your students. • Be certain you are comparing apples to apples. • Looks can be deceiving. • If a product sounds too good to be true, approach with caution. • Understand the lenders credit criteria and application process.
Be informed and take the time to look at the details that will result in an educated decision.
Review and Selection Based Upon: • Terms of the Loan • Customer Service Issues • Processing Methods • Prior Year Statistics
Private Alternative Loan Volume Source: The College Board Trends in Student Aid, 2002
What are the causes for this increase? The Greentree Gazette lists 5 reasons: 1. Growing traditional student enrollment 2. Increased demand for adult/continuing education 3. Rising prices 4. Unchanged Stafford loan limits 5. Stagnant State and Federal budgets (The Greentree Gazette, September 2002, page 82)
The Challenge… Seek and implement new ways to inform and educate your students and parents on the financing options available
Why? Why take on ANOTHER task in an already busy office? • Customer Service • Improved Retention • Lower accounts receivable • Because it’s the right thing to do!
What methods can be used to help educate families on financing options? • Brochure outlining financing options • Individual appointments - at orientation, publicized in office literature, listed on website, promoted by admissions • Group sessions at orientation • Notice with billing statement • Use of email: to prospective students, new students once deposited, current students • Be creative! You know your students and campus best.
End Result: Families that have made good decisions about financing, based on all the facts and opportunities. Financial Aid Officers that feel good about the job we do!