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Dennis [email protected]
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