Alternative Loans Best Practices for Financial Aid Offices SUNY Directors’ Meeting December 7, 2005 Stephen G. Brown Fordham 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 ??!! WWait a minute – How about PLUS ?! GGood point! WWhat is a private educational loan? AAre they for my students? FFor my school? WWhat do I need to know? W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 

Credit Reporting Agencies  Experian   Trans Union   Equifax 

“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 –  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. Brown Assistant Dean Fordham University School of Law New York, NY