1. Dennis Zanchi dzanchi@edfund.org

2. 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

4. 4  Private education loans  Private loans  Alternative loans  Non-federal loans

5. 5 Interest Rate PrivateFederalPLUS Fixed rateNoYes Maximum rate 25%+6.8% 8.25% 8.5% 9.0% Rate will change YesNo

6. 6 Cost of funds + Operations + Inflation + Risk + Profit Borrower rate Private Loan Interest Rate Index Margin

7. 7 Dissecting an Interest Rate 1,4,5 Bank sample June 2006 2 Federal Reserve 3 Federal Reserve Bank Functional Cost and Profit Analysis. Credit Card Cost of Funds 1 2.38% Inflation Rate 2 2.50% Operations 3 0.50% Loan Losses 4 4.85% Total Lender Cost10.23% Profit2.94% Loan Rate 5 13.17%

8. 8 Index Types  Index and borrower rate  Treasury bill  LIBOR  Prime rate

9. 9 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

10. 10 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

11. 11 Prime Rate  Retail ◦ Credit-worthy customers  Secured  Private loans ◦ Wholesale price ◦ Mark-up/margin added  Borrowers lack credit history  Unsecured

12. 12 Margin  Allowance to cover expenses ◦ Rate the borrower pays 10% ◦ Index (cost of funds) -4% ◦ Margin (covers expenses) 6%

13. 13 The Right Choice ?  LIBOR  Prime rate  T-Bill

14. 14 Indexes Mirror Each Other Source: St. Louis Federal Reserve Bank and Federal National Mortgage Association

15. 15 Rates Mirror Each Other  Margin compensates for index variety Any index + Margin = Similar loan rates

16. 16 Variable Rate Payment Risk Based on a 10-year loan term. Loan Amount$20,000 Loan Rate5.00% Cap25.00% Payment Range$212 - $455 Possible Increase115%

17. 17 Private Loan Choices

18. 18 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

19. 19 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

20. 20 Private Loan Choices

21. 21

22. 22 Lender Guidelines  Low cohort default rate  Credit worthiness  Graduation rate

24. 24  Federal education loans ◦ Perkins ◦ GradPlus loans ◦ PLUS loan ◦ Stafford  Stafford loans ◦ Subsidized ◦ Unsubsidized

25.  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 25

26.  Financial aid office  Federal government  Lender  Servicer  Secondary market  Guarantor  Credit bureaus ◦ Experian ◦ Equifax ◦ TransUnion  Ombudsman  NSLDS 26

27. 27  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

28. Monthly payment amount based on a 10 year repayment term. 28

30. 30 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

31. 31 Negative Amortization  Increasing debt  Payments do not cover p rincipal 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.

32. 32 Capitalization  Adding interest to loan balance  Capital = Money borrowed  Interest is paid on capital  “Capitalized” = when interest becomes part of the capital

33. 33  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

34. 34  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

35. 35  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

36. 36 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

37. 37 Federal and Private Loans *Only in extreme hardship will federal loans be discharged. PLUS loans do not have forgiveness options. PrivateFederal Fixed rate/max rateNoYes Fees & interestUnregulatedRegulated Subsidized interestNoPossible Dischargeable*No Repayment optionsLimited5 options PostponementUnlikelyYes Forgiveness optionsNoYes*

38. 38 Private and Federal Loans * CDR is Cohort Default Rate. Offset is the ability for a guarantor to take tax refunds. PrivateFederal Loan educationPossibleRequired (Not for PLUS) Impacts CDRNoYes Subject to offsetNoYes Garnish wagesYes Annual limitsNoYes Tax benefitsYes

39. 39 Private and Federal Loans PrivateFederalPLUS OmbudsmanNoYes Requires good creditYesNoYes CosignerPossibleNoPossible IncentivesYes No

40. 40 Questions