alternative loans best practices for financial aid offices
TRANSCRIPT
Alternative Loans Best Practices for Financial Aid Offices
SUNY Directors’ Meeting
December 7, 2005
Stephen G. BrownFordham Law
What’s going on here?
School is getting more expensive We used to be experts in college
finance Direct marketing and the ‘Net Other financial products available “You don’t need the Financial Aid
Office”
Who Cares ??!!
Wait a minute – How about PLUS ?! Good point!
What is a private educational loan? Are they for my students?
For my school? What do I need to know? What do students need to know?
Private loans – brief history Parents paying cash Parents tapping home equity – 1970s FamilyED and GradED TERI family and secured loans LSAC Law Access Loans 1990s explosion in programs
Students, parents, other co-signers Secured vs unsecured
Private Loans
Credit- based No federal guarantee No federal subsidy Signature- no collateral Market rate interest - no cap Variable interest rate Guarantee fees - WHY??!! Co-Signer options/requirements
Designed to supplement, not replace federal loans
(Many lenders would probably rather have higher $$ limit federally!)
Many lenders have online applications “instant” credit decisions
Many disbursed directly to school Most require school approval
For my students? Increased/increasing COA Decreased resources
Not meeting full need Independent – exhausted unsub
Other parental needs -home equity? Additional cost Repayment issues Deferment/forbearance/cancellation – hah!
Credit based
Imagine… No job No “ability to pay” No collateral Low interest rates Flexible repayment No payment for 7
years Think “mortgage” “car
loan”
Nationally, 15-20% rejection rate for bad credit
Likely to increase !
What is credit scoring?
Fundamentally a way to tell if a loan is likely to be profitable
Review of all aspects of student credit history
may be used to accept/deny or set rates and/or fees
Scores now available to consumer
FACT Act of 2003
Fair and Accurate Credit Transactions Free credit report annually www.annualcreditreport.com
Credit Reporting Agencies
Experian www.experian.com
Trans Union www.transunion.com
Equifax www.equifax.com
“Signature” Loans Made solely on the basis of signature
No collateral – nothing to repossess Diploma?
Credit must be excellent
Market rate interest Variable Commonly “index”
plus “spread” 91 day T bill LIBOR Commercial Paper Prime
As of December 1, 2005
91 day T-Bill 3.90% LIBOR (3 mo) 4.410% Commercial Paper 4.29% (90 day financial)
WSJ Prime 7.00%
Fees Origination/ guarantee Remember – no federal guarantee Re-insurance and self-insurance Fees at disbursement and/or repayment
“Cost” of funds Function of interest rate and fees Kantrowitz “K” factor – www.finaid.org Or… Divide fees over repayment period
and add to rate Changing indices – variable, no cap
Repayment
How much will this really cost? Can I afford it? Repayment options/incentives 10, 15, 20, 25, 30 year repayment
What do I need to know? All of the above plus…
Basic financial info Know when to refer Websites for rates Lender websites Counseling info
Do you really need this?
Remember Private loans can be an important option
for educational finance Other (cheaper) options should be
exhausted first Know the difference
Credit, Credit, Credit Repayment amounts, length, calculators
Have I exhausted you yet?
Stephen G. BrownAssistant DeanFordham University School of LawNew York, NY 10023212 [email protected]