Changing the Conversation – Home Equity, Federal and Private Loans. Leslie Bembridge, Vice-President Product Management, Education Finance. It Started with a Discussion on Student Debt. - PowerPoint PPT Presentation
Changing the Conversation Home Equity, Federal and Private LoansLeslie Bembridge, Vice-PresidentProduct Management, Education Finance
It's not surprising that student loan debt remains a problem child. College prices continue to defy inflation rates and the biggest percentage price hikes are coming from public universities, which is where most middle and low-income students have traditionally depended upon for bachelor degrees.
It Started with a Discussion on Student Debt##22It Quickly Moved to a Discussion of Student Loan Lenders and Consumer ProtectionColleges and Universities are Feeling the Heat
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires the Director of the Consumer Financial Protection Bureau and the Secretary of Education to submit a Report on private student loans. (Issued August 2012)##Then the Discussion Moved to the Cost of CollegeColleges and Universities are Feeling the HeatFrom Customers . . .May 2011 a majority of Americans (57%) say the higher education system in the United States fails to provide students with good value for the money they and their families spend. An even larger majority75%says college is too expensive for most Americans to afford. At the same time, however, an overwhelming majority of college graduates86%say that college has been a good investment for them personally. (Pew Research Center)From Congress . . .October 2011 all colleges and universities required to have a Net Price Calculator available on their web sites so students can receive a more accurate estimate of the real costs of college
From the Administration . . .February 2012 White House Unveils College Scorecard. . .a new tool to the College Affordability and Transparency Center that assists prospective students and their families in comparing colleges before they choose using key measures of college affordability and value. The purpose of the tool is to make it easier for students and their families to identify and choose high-quality, affordable colleges that provide good value.
## As we look ahead to the 2013-14 academic year, financial aid officers will be more challenged than ever to review the offerings of private loans in comparison to Direct PLUS, Graduate Stafford and Home Equity loans and ask the question;
Are federal loans really the best deal for all students and families? The Conversations are changingLike all things in the world of student financial aid, nothing really lasts forever.##Why Borrow Beyond Stafford Loans?Need to borrow for Expected Family Contribution (EFC)
Need to borrow to fill gap left over after financial aid is awarded
Student did not (or will not) apply for financial aid
##6Current State of Graduate Stafford LoansLoans with a loan period beginning on or after 7/1/12 Fixed rate of 6.8% No SubsidiesAnnual and Aggregate limits still the same
Lost repayment incentivesNo origination fee discountsNo upfront interest rebate provided at the time of the loan disbursement Total fees 1%
##7The New Cost of Stafford LoansThe Department of Education is projected to save $18 billion over the next 10 years.
The loss of the interest subsidy to a full-time graduate day student who borrows for the first time in 2012-2013 and was eligible for $8,500 in the past would be about $2,800 term time and $900 in grace period (total $3,700).
The additional interest costs for four-year graduate evening students would be about $4,800 term time and $1,200 in grace period ($6,000).the interest is capitalized on the loans, so borrowers will also be paying interest on the higher amount of their loans.
##Federal PLUS Loan Credit ChangesBorrower cannot have adverse credit, but if they have no credit they can be approved
In the Spring of 2012 the Department of Education modified credit criteria for PLUS to now include unpaid collection accounts and charge-offs as part of the credit review
Items such as being 90 days delinquent on any debt as well as bankruptcy discharges, foreclosures and wage garnishments during the previous five years are now trigger denials for many who may have been approved in 2011-12
##9Federal PLUS Credit StandardsNo debt-to-income ratio requirements
The parent cannot be released from the obligation or legally transfer the loan obligation to the student
Endorser can be obtained, cannot be the student in the case of a parent borrower
Credit is evaluated each year
##Federal PLUS Current State of Rates and FeesLender is the Federal Government4% loan origination feeFixed interest rate of 7.9% for the life of the loan.25% Interest Rate Reduction when payment is made through Auto-Pay
1.5% of Principal Loan Amount rebated after 12 consecutive on-time monthly payments (eliminated July 1, 2012)
##11The New Cost of PLUS LoansThe Department of Education is projected to save $3.6 billion over the next 10 years.
The most obvious result of this is that a borrower who borrows $20,500 will now receive $20,295 and a borrower who borrows $40,000 GradPLUS will now receive $38,400.
Borrowers who choose to repay the loans electronically may still qualify for the0.25% interest rate reduction for electronic loan payments.
##Federal PLUS Benefits
Cancellation due to death of borrower or student (in the case of a parent borrowing)
Cancellation due to permanent disability of the borrower
Identity Theft Cancellation effective July 1, 2006
A graduate PLUS borrower may receive a deferment while enrolled in school at least half-time.
A parent borrower may receive a deferment for a PLUS Loan based on his/her own half-time enrollment or they can defer repayment of PLUS Loans while the student for whom you obtained the loan is enrolled at least half time.
The parent must separately request each deferment period.
If no deferment is selected the loan begins repayment 60 days after disbursement.##13Federal PLUS Repayment Options 10-25 year repayment term Standard, Extended or graduated repayment terms Unemployment and Economic Hardship Deferments No prepayment penalty
Federal Loan Consolidation program exists to extend repayment up to 30 years depending on loan balance.
Tax Benefits Speak with your tax advisor##14In the NewsAs the cost of college has spiraled ever upward and median family income has fallen, the loan program, called Parent PLUS, has become indispensable for increasing numbers of parents desperate to make their childrens college plans work. Last year the government disbursed $10.6-billion in Parent PLUS loans to just under a million families. Even adjusted for inflation, thats $6.3-billion more than it disbursed back in 2000, and to nearly twice as many borrowers.
##The U.S. Department of Education doesnt know how many parents have defaulted on the loans. It doesnt analyze or publish default rates for the PLUS program with the same detail that it does for other federal education loans. It doesnt calculate, for instance, what percentage of borrowers defaulted in the first few years of their repayment period.For parent loans, the department has projections only for budgetaryand not accountabilitypurposes: It estimates that of all Parent PLUS loans originated in the 2011 fiscal year, about 9.4 percent will default over the next 20 years.The analysis, by Mr. Kantrowitz, uses survey data from 2007-8, the latest year for which information is available. Among Parent PLUS borrowers in the bottom 10th of income, monthly payments ate up 38 percent of their monthly income.
##Alternative Loans Borrower EligibilityStudent may be the borrower Co-signer does not have to be a parentOther persons may borrow or co-signInternational student optionsTypically need US Citizen or Permanent Resident as a co-signerTypically need to be enrolled in a degree program at least half-time but also offers options for less than half-time students
##17Alternative Loans Credit ReviewCredit criteria established by the lenderThe presence of a co-signer almost guarantees a lower interest rateCo-signer release available with most lendersIncome verification and DTI more likely to be requiredCredit/FICO Scores are one piece of the criteria for approvalLow-Doc or No-Doc Loans for high credit scorers may be a possibility
##18Alternative Loans Interest Rates and FeesNo Fees (most companies)
Fixed RatesCitizens Bank TruFit Student Loan starts at 5.75%
Variable Interest ratesCitizens Bank TruFit Variable Rate starts at One-Month LIBOR + 2.50%
What are the rates at your school?
##19Alternative Loans FeaturesBorrower chooses repayment optionImmediate, Interest-only or DeferredInterest rate reduction for automatic payments from an account .25% up to .50% is the most commonBenefits for already being a customerLoan forgivenessCover past due balancesSchool CertifiedTax benefitsForbearance optionsRepayment terms 5-20 years
##Status of Alternative LoansIn the years after the credit crisis, department officials point out, other means of financing college such as home-equity loans and private student loanshave become harder for families to get.
##Home Equity Loan/LinesNot regulated by Title IV RegulationsTerms and Conditions vary greatly among lendersBorrower EligibilityYou must be the home ownerInterest RatesFixed or VariableBased on credit criteria established by the lenderIncome verification and debt-to-income ratios more likely to be required Low-Doc or No-Doc Loans for high credit scorers
##22Home EquityLoan Limits Equity in home directly impacts amount borrowedLoan Fees Origination, Appraisal, Closing CostsNot federally insured against disability and death
Funding Education with Home Equity Loansa home equity l