Private Education Loans Options for Educating Borrowers & Families

Agenda  Regulatory Background & Preferred Lender Arrangements (PLA)  Selection Criteria  Lender List Options  Scenarios  Need for more counseling  Evaluating Loan Selection Tools  Private Loan Consolidation  CFPB  Questions

Regulatory Background & Private Loan Arrangements

Previous ED Guidance on Lender Lists “… a preferred lender list can be an effective tool to help families…” “…by providing this information, schools may help students and their parents navigate the increasingly complex student loan landscape.” “…a borrower’s choice of lender may be better informed by preferred lender lists and other consumer information... …which play a useful role in assisting financial aid administrators in dealing with the large volume of requests for information and assistance, and in informing borrower choice.”

Key Intentions of HEOA – July 2010  Greater transparency  Improved information regarding costs  Ensure awareness of federal aid options  Encourage consultation with school financial aid offices  Schools using preferred lender arrangements (PLA) should do so without prejudice and for the sole benefit of their students  Ensure choice of lender  Selection of lenders in borrowers best interest

Private Loan Disclosures  Some information required for prospective borrowers regardless of whether a PLA exists if the school provides information about private loans  Information required by Truth in Lending Act  Inform prospective borrowers that they may qualify for Title IV aid  Inform prospective borrowers that the terms and conditions of Title IV loans may be more favorable than provisions of private education loans  School must ensure private loan disclosure is distinct from Title IV information  Provide self certification form upon request

Lenders are required to clearly communicate loan information in a consistent format, facilitating comparisons between lenders and loan products by April 1 each year. Disclosures will include the following information:  Interest Rates - Low and High  Loan Fees  Default and Late Payment Charges  Repayment Terms  Cost Estimates/Examples  Eligibility  In addition to disclosing this to families, schools can use this information in selecting their preferred lenders. Lender Transparency Disclosures

Application and Solicitation Disclosure (ASD)

Preferred Lender Arrangement (PLA)  A Preferred Lender Arrangement exists:  Lender provides education loans to students/families, AND  School recommends, promotes or endorses the education loan products of a lender –No formal agreement required to trigger definition –Applies to the entire institution and all staff

Institution Requirements for PLA  Disclose and enforce Code of Conduct policy  Disclose method and criteria for lender selection including reasons for selection  Provide borrowers with at least two unaffiliated choices for private loans  Provide Truth in Lending disclosures for each loan program listed (i.e. ASD)  Disclosure statement indicating any eligible private loan request will be processed and that borrowers can choose lenders not listed  Provide annual report to ED

Private Lender & Loan Program Selection Criteria

Lender Loan Programs Available  Borrower and/or school eligibility  Comprehensive product offering  Competitive pricing, rates, fees or other terms and conditions –Approval rates (percentage by tier)  Borrower benefits/repayment incentives  Special uses –Previous school charges outstanding –Application processing after the end of a semester –Less than ½ time or non-degree seeking programs –Computer purchase –Study abroad  Reputation & track record  Stability & longevity  Servicing  Default rate  Other borrower benefits Private Loan Selection Criteria

Quality of Lender Customer Service & Support  Dedicated marketing/service staff  Toll free number – single point of contact  User friendly web-based services offered  Level of automated processing offered  Technical support offered  Training offered  Default management  Other value-added services Private Loan Selection Criteria

Institutional & Student Financial Aid Office Operational Needs  Guide and counsel students and their families efforts to achieve their educational potential by removing financial barriers and simplifying process  Educate students and families through quality consumer information –Up to date product information and comparisons to promote wise choices –Filter loan products that offer the best combination of value and service  Regulatory compliance concerns and control (i.e. HEOA)  Applications assistance & financial advising for borrowers –Application/self-certification methods –Toll free number and user friendly website –Cosigner requirements –Borrower communications Private Loan Selection Criteria

Institutional & Student Financial Aid Office Operational Needs (Cont.)  Loan certification process –Methods (electronic, fax, paper) –Delayed certification offered  Disbursement options –Funding methods (individual check, lender EFT, central disbursing agent) –Funding availability & scheduling to meet school preferences –Requests for additional/reduced loan amounts & cancellations –Refunds/return of funds  Other institutional needs Private Loan Selection Criteria

Options for Educating Borrowers and Families on Private Loan Options

School Options for Private Loans  No Lender List  Comprehensive/Historical List  3 rd Party List  Preferred Lender Arrangement (PLA)

No Lender List Option  No information, guidance or counseling assistance is provided to prospective borrowers on any private education loan programs by any school staff  Borrowers and families are on their own to educate themselves and make informed decisions on private education loan options

Google “Private Education Loan”

Comprehensive/Historical Lender List Option  Schools can provide a neutral, comprehensive list of lenders that provided private education loans from a certain period of time  Cannot exclude any lenders unless they are no longer providing private education loans  Excluding active lenders or adding new lenders triggers PLA requirements  Terms and conditions of loans may be provided  Private loan disclosure requirements must be met  No guidance or counseling assistance is provided to prospective borrowers on any private education loan programs by any school staff

3 rd Party lender List Option “[Not a PLA] as long as the institution ensures that the listing is broad in scope, does not endorse or recommend any of the lenders on the list and the lenders on the list do not pay the third party entity to be place on the list or pay the third party entity a fee based on loan volume generated.”

3 rd Party lender List Option  School is still responsible all applicable compliance  Private loan disclosure requirements must be met  No guidance or counseling assistance is provided to prospective borrowers on any private education loan programs by any school staff (unless it is considered a PLA)  School historical and/or local lenders may be excluded  Some loan programs may not be available to your borrowers  Additional topics for consideration: –Loan comparison functionality –Advertising influence on 3 rd party sites –Unsolicited s to borrowers

Preferred Lender Arrangement Option  School staff can provided guidance and counseling to borrowers and families  Provides a meaningful starting point for making informed decisions on private loans  Allows for more streamlining of electronic processing

Preferred Lender Arrangement Option  Disclose and enforce Code of Conduct policy  Disclose method and criteria for lender selection including reasons for selection  Provide borrowers with at least two unaffiliated choices for private loans  Provide Truth in Lending disclosures for each loan program listed (i.e. ASD)  Disclosure statement indicating any eligible private loan request will be processed and that borrowers can choose lenders not listed  Provide annual report to ED

General Evaluation of Your School Lender List Options

Lender List Option Scenarios

Which option(s) allows you to specify or exclude lenders ?

Which option(s) requires an annual report to ED ?

Which option(s) requires making the Application and Solicitation Disclosure available?

Which option(s) requires an RFI or RFP? NOT REQUIRED

Which option(s) allows you to advise & counsel students?

Is More Counseling Needed?

National Economic Research Associates (NERA) Report (March 2012)  65% of borrowers misunderstood or were surprised by aspects of their student loans or the student loan process  Two-thirds of private loan borrowers did not understand the major differences between their private and federal options  80% obtained at least some of their student loan information from their college’s counselors or website

Related Private Loan Topics

Evaluating Loan Selection Tools  Provide sufficient information to allow informed decisions in borrowers best interest?  Comparison functionality?  Level of compliance with required disclosures?  Ease of application process?  Financial literacy counseling?  Lender neutral?  Lender revenue sharing, paid placement/ranking and/or advertising?  Additional borrower solicitations?

Private Loan Consolidation  $164 billion outstanding  Private loans cannot be consolidated through the federal student loan consolidation program  Some lenders have recently left the private education loan business  Few lenders are offering private consolidation loans 

Consumer Financial Protection Bureau (CFPB)  CFPB goal is to get a complete picture of private student lending:  Information available to shop for private student loans  Role of schools in the marketplace  Underwriting criteria  Repayment terms and behavior  Impact on choice of field of study and career choice  Servicing and loan modification  Financial education and default avoidance

Consumer Financial Protection Bureau (CFPB)  CFPB sought comments about private student loans by January 17, 2012  NASFAA & NACUBO collaborated on comments  CFPB and ED  To produce a report to Congress by July 21, 2012  Previously released Financial Aid Shopping Sheet draft and Student Debt Repayment Assistant  Created private student loan ombudsman  New complaint system launched in March 2012 with letters to 6,000 university officials 

Questions?

Disclaimer The information contained in this presentation is not comprehensive, is subject to change based on additional guidance or directives from the U.S. Department of Education (ED). It serves only as general, background information for further investigation and study related to the subject matter. Nothing in this presentation constitutes or is designed to constitute legal advice. Please consult your own counsel to ensure that you are in full compliance with requirements applicable to your institution.

References  Slide 4: Dear Colleague letter GEN May 2008  Slide 6: §152(a)(1); §  Slide 9: HEA §151(8); §601.2(b)  Slide 10 & 24: HEA §487(h); §152(a) § (a)(d)(1-5)  ED Annual PLA Report:: HEA §153(c)(2)(A); §601.20(a) & (b)  Slide 21: Federal Register: October 28, 2009 (Volume 74, Number 207) – Final Rule  Federal Reserve final rules for private loans – August 14, 2009  Federal Register, 34 CRF October 28, 2009

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