hesc symposium unlocking the mysteries of private student loans

© Student Lending Analytics, LLC

HESC SymposiumUnlocking the Mysteries of Private Student

Loans

This presentation does not constitute formal policy or legal advice and should not be relied upon as such.


Unlocking the Mysteries of Private Student Loans

Agenda

What is the current state of the private student loan market?

How are schools addressing this shortfall in private student loans?

How can financial aid staff inform and educate students about private student loans?

How will the regulatory environment impact private loan disclosure in the future?

What is the outlook for 2009-10 and beyond?



Growth in Private Student Loans

Source: College Board Trends in Student Aid, 2007-08



The Difference That Two Years Makes

2007 2009 (estimates)

Loan Volume $19 billion $10-$12 billion

Avg. Loan Margins LIBOR + 5% LIBOR + 9% to 10%

Min. FICO score 620 to 630 680 to 700

Cosigners 50-60% 80-90%

Quarterly Gross Defaults 0.7% 1.2%

Number of Lenders Multiple choices Limited choices

Sources: College Board data used for 2007 Loan Volumes and SLA estimates for 2009 Loan Volume estimates, reviewed securitization prospectus for Loan Margins, DBRS research for Quarterly Gross Defaults



Lender List Penetration Rates

77%72%

69%65%

36%

28%24%

21%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Chase WellsFargo

SallieMae

Citibank Discover US Bank SunTrustBank

PNCBank

Per

cen

tage

of

Tot

al

Source: SLA Analysis of 425 private loan lender lists, August 2009



Interest Rate Ranges For Major Lenders

4.25% 4.25% 3.88%4.41%

5.02% 5.20% 5.38%4.38%

11.00% 11.24% 11.13% 11.16%

12.87%12.20% 12.13%

14.38%

0.0%

5.0%

10.0%

15.0%

Discover WellsFargo

SunTrust PNCBank

Chase U.S.Bank

Citibank SallieMae

Cu

rren

t S

tart

ing

Inte

rest

Rat

e R

ange

s (I

nd

ex +

Mar

gin

)

Fees None None 0% to 6% 0% to 6% None None 0% to 6% 0% to 5%

Source: SLA analysis of repayment examples on lender websites, September 2009



Interest Rate Distribution in Private Loan Securitization

1%

4%

26%

17% 17%

4%

31%

0.0%

10.0%

20.0%

30.0%

40.0%

Less than7%

7.0% to7.99%

8.0% to8.99%

9.0% to9.99%

10.0% to10.99%

11.0% to11.99%

Over 12.0%

Per

cen

tage

of

Tot

al L

oan

s in

SL

M 2

007-

A T

rust

Source: SLM Private Credit Student Loan Trust 2007-A, March 2007



Recent Changes to Private Loan Margins

Lender Date of Change

Minimum Margin

Maximum Margin

Notes

Discover June 2009 150bp 300bp Margin increase

Citibank June 2009 188bp 212bp Shifted from Prime to LIBOR

Chase June 2009 -110bp No change

Margin on cosigned loans reduced

PNC Bank July 2009 175bp 275bp Margin increase

Wells Fargo July 2009 -150bp -150bp Reduced floor on Prime index



Customized Pricing: Chase Select Loans

3.20%3.65%

4.40% 4.40%

7.50%

9.75% 9.75% 9.75%

0.0%

5.0%

10.0%

15.0%

PENN George Washington UConn Drexel

Cu

rren

t M

argi

ns

on P

riva

te S

tud

ent

Loa

ns

3ML

+ S

tate

d M

argi

n

2007 Cohort Default Rate: 0.7% 1.2% 2.0% 2.0%

Source: SLA Analysis of lender lists at these institutions, September 2009



What About Credit Unions?Credit Union Student Choice

– Network of over 80 credit unions nationwide– Variable-rate loans usually based on one-month LIBOR– Average funded rate of 5.8% with no origination fees– Structured as credit line– Loan limits up to $75,000– Requires membership in credit union to apply – Cosigner recommended

Individual credit unions in college towns often provide competitive student loans and transparent disclosures too

– University of Southern California Credit Union (3.3% to 6.8%)– University of Wisconsin Credit Union (4.0% to 9.5%)– University Credit Union serving University of Maine system (3.25% to 7.75%)

Do not assume credit unions ALWAYS offer better rates and terms



Transparent Disclosures

• University Credit Union (Maine)

• University of Southern California Credit Union

3-month LIBOR + Margin= Interest Rate

Borrower (with Cosigner)

Borrower Only (No Cosigner)

FICO Score Margin Margin

750 and above 2.00% 2.00%

730 to 749 2.50% 3.00%

700 to 729 3.00% 3.50%

680 to 699 4.00% 4.50%

660 to 679 5.50% 6.00%



State Alternative Loan Programs – Fixed Rate

State Loan Name Current Rate Fees

Alaska Suppl. Ed. Loan 7.30% 5%

Connecticut CT FELP TBD TBD

Massachusetts MEFA 7.75% to 8.89% 4%

New Jersey NJCLASS 7.62% to 7.92% 2%

North Dakota DEAL Loan 5.99% to 7.90% 0% to 2%

Rhode Island RI Family Ed. 7.76% 4%

Texas College Access 6.00% 3% to 5%



State Alternative Loan Programs – Variable Rate

State Loan Name Current StartingRate

Fees Index

Maine Maine Loan 8.43% 4% MELA Bond Rate

Minnesota SELF Loan 4.30% None 3ML + 3.5%

North Carolina Extra Educ. 7.00% None 3ML + 3.0%

North Dakota DEAL Loan 2.1% to 3.1% 0% to 2% 3ML + 1.5% to 2.5%

Texas College Access Loan

3.91% 3% to 5% N/A

Vermont VSAC Extra Advantage

5.19% to 8.19%

0% to 5% 3ML + 4.25% to 7.25%



What Determines Pricing on Private Loans?

Competitive dynamics

Cost of capital

Availability of capital

Return expectations– Shareholders– Members

Default/Writeoff experience


Unlocking the Mysteries of Private Student Loans Agenda


How are schools addressing this shortfall in private student loan capacity?

How can financial aid staff inform and educate students about private student loans?





Level of Concern About Private Loan Availability

Survey question: How concerned are you about the availability of PRIVATE loans for your students for the 2009-10 academic year?Source: SLA Flash Survey: Private Student Loans, June 2009 (187 respondents)

14%

44%

17%

52%

6%

38%

4%

31%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Very Concerned Somewhat Concerned

Per

cen

tage

of

Tot

al R

esp

ond

ents

Overall

4-year private

4-year public

2-year public



Perceived Availability of Private Loans

7%

46%

25%

1%

21%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Much LowerApproval Rates

Lower ApprovalRate

Same ApprovalRate

Higher ApprovalRates

Not Sure

Per

cen

tage

of

Tim

e T

hat

Com

pan

y W

as M

enti

oned

By

Sch

ools

L

ink

ing

to A

ny

Th

ird

-Par

ty S

ite

Survey question: Please describe your impressions regarding private loan approval rates for your students today, as compared to a year ago. Source: SLA Flash Survey: Private Student Loans, June 2009 (187 respondents)



Strategies for Dealing with Private Loan Issues

Survey question: What are your current strategies to help students find private, nonfederal loans for the 2009-10 school year?Source: SLA Flash Survey: Private Student Loans, June 2009 (187 respondents)

73% 77%

60%

16%

78% 73%

54%

25%19%

3%

16%

50%

15%

51%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Paren

t PLUS

Co-sig

ner

Tuitio

n Rep

aym

ent P

lans

Couns

eling

State

pro

gram

s

Insti

tutio

nal L

oans

Multi

ple Len

ders

Credi

t Unio

ns

Per

cen

tage

of

Tot

al R

esp

ond

ents

Aug-08

Jun-09


Unlocking the Mysteries of Private Student Loans Strategies To Address Private Loan

ShortfallCosigners– Increase odds for approval while ensuring best rate on the loans– Almost a requirement these days

• Sallie Mae targeting 90% of loans to have cosigner• Wells Fargo recently eliminated credit-ready loans for juniors/seniors/

graduate students

Parent PLUS loans– Interestingly, PLUS loan volumes may not have increased despite easier credit

terms and deferment option, which went into effect July 1, 2008– FFEL PLUS Loans have denial rates 2X as high as DL PLUS (FinAid research)– Opportunity for additional unsubsidized Stafford if application turned down

Tuition repayment plans– Three major vendors:

• FACTS/Nelnet Tuition Management (Nelnet)• Tuition Management Systems (Key Bank)• TuitionPay (Sallie Mae)



Prevalence of Private Loan Lender List

Survey question: Is your institution planning to provide students with a lender list for private loans for the 2009-10 school year?Source: SLA Flash Survey: Private Student Loans, June 2009 (187 respondents)

56%

34%

10%

69%

21%

10%

42%

54%

4%

12%

65%

23%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

Yes No Not Sure

Per

cen

tage

of

Tot

al R

esp

ond

ents

Overall

4-year private

4-year public

2-year public



Reasons Given For Not Providing Lender List

Survey question: Please describe the importance of these factors in determining why your institution will not be providing students with a lender list for private student loans for the 2009-10 school year. Source: SLA Flash Survey: Private Student Loans, June 2009 (187 respondents)

3.9

3.5 3.53.3

2.9

2.3

0.0

1.0

2.0

3.0

4.0

5.0

Don't Want toEncourage

Private Loans

RFI Process ListMaintenance

Regulations Low Volumes Unable to FindLenders

Rel

ativ

e Im

por

tan

ce o

f F

acto

rs (

Mos

t Im

por

tan

t =

5.0

)



Lender Selection Process for 2009-10

Survey question: Please describe your institution's process for developing a lender list for private student loans.Source: SLA Flash Survey: Private Student Loans, June 2009 (187 respondents)

35%

32%

12%

8%

14%

0.0%

10.0%

20.0%

30.0%

40.0%

Formal RFI Keep List from08-09

All Lenders Last3-5 Yrs

Informal Process OtherPer

cen

tage

of

Res

pon

den

ts W

ith

Len

der

Lis

t fo

r 20

09-1

0



Information Provided on Lender List

Survey question: Describe the types of information that you will be providing about the lenders appearing on your institution's lender list for private loans. Source: SLA Flash Survey: Private Student Loans, June 2009 (187 respondents)

83%

69%65%

46%

23%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

Links to LenderWebsite

Loan Fees General InterestRate

Link toApplication

Specific InterestRate

Per

cen

tage

of

Res

pon

den

ts W

ith

Len

der

Lis

t fo

r 20

09-1

0



Will Multiple Applications Harm Your Credit Score?

Research shows that students spend more time researching federal loan options than private student loan options

New policy from Fair Isaac (FICO score) on student loan shopping– “In general, student loan shopping inquiries made during a focused time period (for

example 30 days) will have little to no impact on your score.”

Advice from Fair Isaac on myfico.com site:– Doing a little homework first is always a good idea no matter what type of credit you're

seeking. – You can generally avoid having those inquiries affect your score if you finish your rate

shopping in a reasonable amount of time. – Then try to finish your rate shopping and finalize your loan within 30 days.– Not only will loan rates be easier to compare when the quotes come only a few days

apart, but you also will protect your FICO score.

SLA research found loan interest rates varied from 7% to 12% based on recent shopping of 6 major lenders





How can financial aid staff inform and educate students to make good decisions about private student loans?





Who Is Taking Out Private Loans?

Source: Project on Student Debt analysis of NPSAS data, August 2009

12% 11%

5%

1%

42%

25%

14%

4%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

For-Profit 4-YR Private 4-YR Public 2-YR Public

Per

cen

tage

of

Stu

den

ts T

akin

g O

ut

Pri

vate

Loa

ns

2003-042007-08



Borrowers Not Maximizing Stafford Loans

Source: Project on Student Debt analysis of NPSAS data, August 2009

25%38%

11%

12%11%

14%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

2003-04 2007-08

Per

cen

tage

of

Stu

den

ts T

akin

g O

ut

Pri

vate

Loa

ns

Did Not Apply For Federal Aid

Completed FAFSA, No Stafford

Borrowed Less Than Maximum

48%

64%



Counseling Topics

25%

17%

21%

30%

23%

32%

51%

36%

44%

48%

49%

58%

53%

43%

0.0% 10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

FAFSA

Appeal EFC

Impact of Scholarships on Aid

Loans

Professional Judgment

Jobs

Scholarships/Grants

Very Frequently

Frequently

Source: SLA Flash Survey on Financial Aid Counseling, July 2009



The Purchasing Decision

Decision makers: Parents of undergraduates

Federal funding options: Aware but confused

Rationale for choosing private loans: – Time constraints– Incomplete funding to cover all costs of education – Ineligibility for Federal aid

Sources for information about private loans: Rely heavily on schools

Importance of name recognition: Many chose based on this factor

Frequency of comparison shopping: Many went with the first loan offered to them

Source: Federal Reserve Consumer Research and Testing, 2009



The Purchasing Decision

Focus on interest rates first

Factors that determine rates are important to consumers

Variable-rate nature of these loans worries consumers– Want to see historical rates so they have some context

Consumers want to see fees expressed in dollars and also want to understand rationale for fees also

Information about availability of federal loan alternatives was found to be useful

Understanding of basic loan terminology often confusing to consumers– Concept of loan margin

Many want to speak to a live person tooSource: Federal Reserve Consumer Research and Testing, 2009



Calls To Lender Customer Service Centers

The Good…– “Gave great details on each program and recommended that I explore other

lenders to find the right one for me.”– “Especially thorough about repayment information explaining exactly how

that would work and when I would have to pay what.”– “A great CSR! Walked me through each loan slowly and carefully, making

sure I understood all aspects.”– “Advised work study as an option.”

And Not So Good– “All but ignored federal loans, even when I mentioned that I had not yet used

my Stafford loans.”– “Pushed me to begin the application over the phone immediately.”– “Really pushed the private loan. "What most college students go for.”– “Could not have wanted to get off the phone faster. Provided only the most

basic information on topics.”

Source: SLA Lender Call Center analysis, September 2009



Entrance Counseling for Private Loans

Take out federal loans before ever considering these “last resort” loans

– Generally higher interest rates and less repayment flexibility than federal loans– Based on SLA research, the average private loan interest rate is 10%-11%

Cosigners almost always required

Know your interest rate before signing anything– Index (Prime or LIBOR) + Margin

Know that your interest rate will go up– Since 1990, 1 month LIBOR has ranged from 0.3% (current) to 9.125% (11/90)– “Tyranny of calculators”

Shop around!– SLA research in April 2009 found that for the same student and cosigner pairing

that interest rates varied from 7% to 12%



Entrance Counseling for Private Loans

Study the details in the promissory note– Can the lender increase your interest rate if you are late with one payment?– How many days after the due date is a payment considered late?– What fees does the lender charge beyond the origination/repayment fee?– How frequently will your interest rate change? Monthly payment change?

Borrowers have option to cancel the loan

If you can pay interest only during while you are in school, DO IT!– It can save you thousands of dollars in loan repayment

Expand your alternatives by considering credit unions or state-run alternative loan programs

DO NOT take out a private loan if you can avoid it!



Exit Counseling for Private Student LoansCongratulations on your upcoming graduation…now it is time to repay your student loans!

These loans will not go away if you don’t pay them– May not be dischargeable in bankruptcy– Stay with you even in death

Once you have settled down to your new address, notify your lender so coupon books/statements will reach you

Find your original paperwork, including your promissory note and Disclosure Statement – Contact lender if you can’t find it

Be pro-active with the borrower benefits that you were promised

Confirm the date that your first payment will be due– Typically have 6 month grace period after graduation



Exit Counseling for Private Student LoansDo not be surprised that your current loan balance is higher than the amount of your original loan

If you are concerned about your ability to make payments on your loans, contact the lender immediately to discuss your options– Forbearance allows you to postpone payments

Your monthly payment will typically be adjusted quarterly or annually by the lender– Expect that interest rates and therefore your monthly payment will increase

as the economy improves

Set up your monthly student loan payment on auto-pay– Earn a reduction in interest rates from 0.25% to 0.50%– Eliminate potential for late fees, which can run as high as $30

If you are ready to pay down some extra principal, contact the lender in case you need to make any special notation on the payment





How can financial aid staff inform and educate students to make good decisions about private student loans?





What Is a “Preferred Lender Arrangement”?

Definition of preferred lender arrangement (from HEOA)– Preferred lender arrangement.--The term `preferred lender

arrangement'-- (A) means an arrangement or agreement between a lender and a covered institution or an institution- affiliated organization of such covered institution

• (i) under which a lender provides or otherwise issues education loans to the students attending such covered institution or the families of such students; and

• (ii) that relates to such covered institution or such institution-affiliated organization recommending, promoting, or endorsing the education loan products of the lender;

NPRM: Lender list that does not have all lenders who lend to students at schools IS A “preferred lender arrangement”



What Are Requirements for A Preferred Lender List?

Web site

Publications

Mailings

Electronic messages

Materials that describe or discuss education loans



What Are Requirements If I Have A Preferred Lender List?

Describe method and criteria of selection which must be best in the best interest of borrowers

Indicate reasons why each lender was selected

Disclose that there is no requirement for borrower to choose lender on the preferred lender list

Must have minimum of two lenders on list and disclose any affiliate relationships

Exercise a duty of care and a duty of loyalty in compiling the list

Not less than the information required to be disclosed under section 153(a)(2)(A)

File an Annual Report



What If I Just Provide Information About Private Loans?

Model disclosure forms required under Truth-In-Lending Act– Lenders will provide

Information on availability of Title IV loans or other assistance

Statement to the effect that Title IV loan terms and conditions “may be more beneficial than those of private loans”

Provide information before students or families select a lender

Information must be provided in manner distinct from Title IV loans

All of this information must be provided whether or not school has “preferred lender arrangement”



Regulation Z and Private Student Loan Disclosure

Federal Reserve provided final rules in July 2009

Compliance Date: February 14, 2010

Key regulations:– Consumer has thirty days after approval to decide whether to take loan– Consumer can cancel loan for up to three business days after

consummation

Disclosure requirements– Application– Approval– After consumer accepts the loan

Borrower must complete self-certification form– Lender must have signed and completed form before consummating loan



Regulation Z DetailsExemptions– Extensions of credit with a term of 90 days or less (“emergency loans”)– Tuition billing plans

• Interest rate not applied to balance• Term of less than a year• May be payable in more than four installments

Includes disclosure of private education loan discharge limitations in bankruptcy on application forms

Disclosure of federal loan options– “May be obtained in lieu of or in addition to private education loans”– “Federal Loan Alternatives”

Sets maximum rate at 25%, where one is not available

Co-branding prohibition and preferred lender lists– “[Name of loan] is not being offered or made by [school] but by [lender].”



Self-Certification FormLender must obtain from consumer a self-certification form before consummating the loan– Cost of attendance– Specific information about consumer’s other financial aid and need

May be provided to consumer in electronic format

Dept. of Education must develop the form

Form will include statement to the effect that “Consumer is encouraged to communicate with the financial aid office about the availability of other financial aid.”

Final rule permits lenders to provide form directly to the consumer



Information from Preferred LendersResponsibility: Lenders must provide the general loan information required on the application form to the educational institution that it has a preferred lender arrangement with

Timing: April 1st of each calendar year or within 30 days of entering into a preferred lender arrangement

Period covered: Applies to loans that lender plans to offer from July 1 of current calendar year to June 30 of the next calendar year

Knowledge of preferred lender arrangement: Lender not required to comply if not aware that it is a party to preferred lender arrangement

Financial Aid staff must contact lenders to receive model form



Disclosure Requirements: Application Process



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Student Lending AnalyticsContact Information

For more information about SLA and our Private Student Loan Ratings Service, please contact us at:

Tim Ranzetta

Student Lending Analytics LLC

650-218-8408

[email protected]

www.studentlendinganalytics.com



Student Lending Analytics: Resources Available

SLA Private Student Loan Ratings

2009 SLA Private Loan Series – Ten part series on topics ranging from finding a cosigner to reading the

promissory note

Student Lending Analytics Blog– Timely, insightful information about the student loan market

Private Loan Insight Survey

Student Satisfaction Surveys



Private Student Loan RatingsAvailable at http://www.studentlendinganalytics.com/ratings.html

Featured on front page of New York Times Business

Focused on evaluating eight lenders that appeared most frequently on over 700 school lender lists that SLA researched

Includes the following factors in ratings:– Expected loan cost– Borrower benefit savings– Fee structure – Flexibility of repayment options– Customer service – Financial stability

SLA receives no compensation from any lenders

hesc symposium unlocking the mysteries of private student loans

Documents