Director of Business Development What is the Right Type of Loan? – Help your students fast break to the best loan for them! Julie Moreno Rehder ELM Resources Director of Business Development Kim Thomas First Marblehead Relationship Manager

Agenda Funding the gap Comparing PLUS and Private Loans Understanding APR and rate shopping Strategies and school communication examples

Gap Funding Common Ways to Pay After the “free money” and savings run out….. some wise, some not so much…..! Hold Out Until Your Kid Gets to the 11th Grade then Start Up a 529 Plan Powerball Lottery 1 in 146,107,962 Google Direct Loan Perkins PLUS Payment Plans Credit Cards Home Equity Retirement Accounts Educational Private Loans Education Loan Resource Continuum Source: Adapted from 2012 PASFAA Fall Conference Presentation 3

Comparison Credit Factoid: 19.6% of the population has a credit score of 750-799 18.1% of the population has a credit score of 800-850 Source: MyFico.com 4

Federal and Private Comparison, continued 5

The Private Student Loan Market Today’s Market Originations Student loan issues are front and center but many are looking to get a better understanding of student loans, the loan market, the role of the government vs. the private sector, and other student loan/higher education related issues.

The Private Student Loan Market

Myth vs. Fact MYTH: Private student loans are all variable products with extremely high interest rates. FACT: Most lenders offer students the choice of fixed-rate or variable-rate products. All of the major lenders - who provide 95% + of all private education loans - offer competitively priced fixed-rate higher education loans and give students the option of choosing which product and interest rate works best for them. Despite the stories and political rhetoric, fixed-rate products are a common offering today.

Myth vs. Fact MYTH: Private student loans can pose more risk for borrowers than federal student loans. FACT: Federal loans, in contrast to private student loans, are provided without the most basic consumer protection – a determination of the borrower’s ability to repay. The rigorous underwriting of today’s private student loans helps ensure students and families borrow for college at manageable debt levels. Income-based repayment and other deferments and forbearance policies can offer relief for struggling borrowers, but it is better for both borrowers and taxpayers to consider ability to pay ahead of time.

Myth vs. Fact MYTH: Students and families do not receive adequate information about private student loan terms before borrowing. FACT: Lenders provide three notices containing 18 disclosure items about private loan terms at three different times before a private loan is made. These disclosures are required by law. The Federal Reserve conducted extensive consumer testing before establishing these new disclosure requirements, which have been in effect since February 2010. In fact, most lenders go well beyond providing only the information required. For instance, most offer online tools to assist with loan repayment, money management, and budgeting.

Myth vs. Fact MYTH: Government loans are always less expensive for borrowers than private loans. FACT: When measuring the true cost of credit through an APR comparison, private loans often compare favorably to unsubsidized federal loans, particularly PLUS Loans for parents and graduate students. It depends on the individual characteristics of the borrower, but for many, private loans offer better terms and pricing. Borrowers (and usually co-signers) with solid credit histories will find private loans offer a lower interest rate and lower (often zero) fees, than PLUS loans in particular, which carry a 7.9 percent interest rate and charge a 4 percent origination fee. This is true for both fixed- and variable-rate private loans.

APR vs. Interest Rate: Incorporating the Cost of Fees Fees are sometimes a “hidden” cost that can increase the overall cost of borrowing more than just the fees themselves because of the interest that capitalizes on the fees, or the reduced loan amount received up front. The interest rate is the cost of borrowing money expressed as a percentage rate. It does not reflect fees or any other charges you may have to pay for the loan. Federal loans only talk about interest rate. An Annual Percentage Rate (APR) is a broader measure of total cost to you of borrowing money. The APR reflects not only the interest rate but factors in fees and other charges that you have to pay to get the loan. For that reason, your APR is usually higher than your interest rate. Private lenders must disclose APR.

The Cost of Not Shopping

Understanding APR & Rate Shopping Direct PLUS in 2015-16 Loan amount $10,446.26 4.272% fees ($446.26) Net Loan Proceeds $10,000.00 Interest Rate 6.84% Term 120 months Monthly payment $120.43 Interest paid $4,005.39 Cumulative payment $14,451.65 Private Education Loan Loan amount $10,000.00 Zero fees ($0) Net Loan Proceeds $10,000.00 APR 7.83% Term 120 months Monthly payment $120.43 Interest paid $4,451.65 Cumulative payment $14,451.65 To better understand APR and rate shopping, let’s take a look at this example between a Direct PLUS and a zero-fee Private Loan borrowing $10,000. *Due to the PLUS fees, the loan amount is at the $10,446.26 so both types have the net loan proceeds of $10,000. *Keeping in mind the difference between Interest Rate and APR…PLUS loans shows just the interest rate not including the fee and Private loans disclose APR which is inclusive of the broader cost of all fees. *So, looking at the break-even point, if we are to show the APR (broader cost) on the Direct PLUS, the PLUS would be the same as taking out a private loan with an APR of 7.83%. *And also, that 7.83% APR is on the mid higher end of APR range for most private loan lenders. As we mentioned earlier APRs with private lenders range from 2.25% to 12.99%. The borrower may be qualified for a lower APR on a private loan than a PLUS. The up-front fees on Direct PLUS push the actual Annual Percentage Rate (APR) to 7.83% The example above shows a “break-even” point on a $10,000 loan between PLUS and a zero-fee Private Education Loan with immediate repayment

Fees Make a Difference! PLUS vs. Private Loan Amount $20,892.53 $20,000.00 Fees in % 4.272% 0% Fees in $ $892.53 $0 Net Loan Proceeds Interest Rate % 6.84% Monthly Payment $240.86 $230.57 Total Amount Repaid $28,903.31 $27,668.59 Difference Savings of $1,235 Here is an example where PLUS and Private take out $20,000…PLUS is $20,892.53 due to fees so we can have the net loan proceeds at $20,000. *Here we are looking at interest rates on both at 6.84% on a 10 year immediate standard repayment term. *Because of the fees on the PLUS, the borrower would save money taking out a Private Loan versus a PLUS. (If PLUS was expressed in APR, it would be higher than the 6.84% because of the fees. APR for Private would still be the 6.84% IR expressed in this example as there are no fees.) Assumes 10 year immediate standard repayment terms

Interest Rates Make a Difference! PLUS vs. Private Private A Private B Loan Amount $20,892.53 $20,000.00 Interest Rate / APR 6.84% / 7.83% 5.84% / 5.84% 4.84% / 4.84% Fees % 4.272% 0% Fees in $ $892.53 $0 Net Loan Proceeds Monthly Payment $240.86 $220.44 $210.57 Total Amount Repaid $28,903.31 $26,452.38 $25,268.45 Difference Savings of $2,451 Savings of $3,635 Here…another example of previous slide example. Same $20,000 net loan amount, with PLUS rate at 6.84% and APR of 7.83% if you include the fee. On the private examples, the interest rate and APR is the same because of there are no fees. You many be asking why did you put in lower interest rates on the Private examples…Yes, we could have put in higher ones showing APRs higher than the PLUS APR. Again, Keep in mind, lender private loan product rates range from 2.25% to 12.99% and there are borrowers that DO qualify for these lower APRs on Private Loans and could save thousands of dollars, if given the option to shop and choose. Assumes 10 year immediate standard repayment terms

Examples of School Communication Strategies

School Communication Strategies Is your school “Pro-PLUS?” Here’s a website example: “Before applying for a private or alternative education loan, you may qualify for grants and/or other assistance under Title IV of the Higher Education Act. Loans under Title IV include the Federal Stafford and the Federal PLUS loan. These Title IV loans may have terms and conditions that may be more favorable than the terms and conditions of private education loans.” Is your school “neutral” Here’s a website example: Private Educational Loans and Direct PLUS Loans should be considered as a last resort, but may be necessary to finance a college education. To learn more about these options, please review the comparison chart and the suggestions below. If you have good credit history, a private loan may cost less than a federal student loan- be sure to consider all of your options and compare carefully!

Shopping Sheet Example

School Communication Strategies, continued Example of the report showing changes the lender has made to their loan product information. SOURCE: Geneva College

Ferris State University School Award Letter Strategies

University of Tulsa

Univ. of Tulsa - website

What’s the bottom line? Each family’s situation is unique All consumers should make an informed decision before deciding on a loan. There is no down side to shopping around. Each family’s situation is unique Applying for multiple credit-based student loans (rate shopping) in a 30-day window is treated as one inquiry when determining a credit score* Applying for a private student loan does not impact ones eligibility for a Direct PLUS Loan for parents or graduate and professional students All approved borrowers get the same PLUS deal: 6.41% with 4.2+% up-front fees. While PLUS may be a good option for those with less than excellent credit, private loans may offer those with above average credit a better rate, zero fees and more repayment discounts. *Source: myFICO.com

Questions / Discussion? Thank You! Questions / Discussion?