Question and Answers for Students and Families Seeking Private Student Loans

Goal of the question and answer is to provide students with criteria that they should consider as they look at private loans. It is important for students to understand that they should exhaust all Federal, State, and Institutional Aid programs prior to considering a private loan. The questions below are intended to be guide as students consider private loans products currently out on the market and the responsibilities that they entail.

What is a Private Loan?

A private loan is a credit-based consumer education loan that can be used for any education-related purpose: tuition, room and board, books, fees, transportation-even a computer. Generally, a private loan can be used to cover the total cost of education minus financial aid and it may offer the same tax benefits as federal student loans-consult your tax advisor.

Should I apply for Federal Aid prior to apply for a private loan?

Yes. Students and families should exhaust all Federal, State, and Institutional options before considering a private student loan. Federal student loans offer unique benefits that private student loans may not have. As always, when considering any loan, students need to ask, "What do I realistically need to borrow?" That fundamental question is important because what you borrow will need to be repaid.

What is a realistic projection of your starting salary and future earnings potential?

To determine a projection of your starting salary, we have provided a reference chart. It is important to understand that all educational loans must be repaid. Further, as you are considering taking a private education loan, you should be aware of what your potential annual/monthly salary will be. Such information will help you determine how much of your monthly salary will go towards your monthly payment of your private student loan.

What are examples of derogatory credit? When should I consider applying with a co-borrower?

Some examples of derogatory credit include but are not limited to: low FICO score, insufficient credit history, delinquency on current credit accounts (past due 30 days and more), credit accounts past due, high account balances, too many credit inquiries, and bankruptcy. A student might consider utilizing a co-borrower if he/she has a form of derogatory credit. In some cases, the use of a co-borrower can affect the interest rate and terms of the loan that the student will receive.

What impact will apply for multiple private loans have as I "shop around" for an interest rate?

"Shopping around" for an interest rate on a private education loan is not uncommon. However, it is important for students to know that every time they apply for an educational loan, they are providing permission to lenders to "inquire" about their credit. Currently, there is not a process in place that allows credit bureaus the ability to consolidate the credit inquiries made for private education loans. (Credit inquires for auto loans and mortgages are consolidated within a 45 day window). Thus, it is in the best interest of students to work to minimize the number of credit inquires.

What are the primary indexes that are used to determine the interest rate offered by lenders?

LIBOR and Prime are the two key financial indexes that most lenders use to set interest rates on private education loans. Most loan interest rates are set by using the value of the chosen index plus or minus a percentage or "spread." LIBOR (London Interbank Offered Rate), is the average interest rate that major international banks charge one another to borrow money. LIBOR has different rates of maturity, including 1-Month, 3-Month, 6-Month, and 1-Year. LIBOR rates are published daily in the "Money Rates" section of The Wall Street Journal. The Prime Rate is the interest rate charged by most major banks to their most creditworthy customers. LIBOR is on average 4 points lower than the Prime Rate and also tends to experi�ence less market volatility.

When will I find out about what the terms of the loan are?

While a simple question, when students find out about the terms of the loan can vary from lender to lender. It is advantageous to student if the lender can disclose such information upon approval as it allows the student to then decide whether or not the private loan product is the right product for the student. Information disclosed should include: the interest rate, annual percentage rate, and any associated fee. If the lender is not able to disclose such information up front, it can make it difficult for the student to determine the cost of the loan.

How does my FICO score play a role in determining the interest rate I receive on a private loan?

Private loans are credit-based, which means a student's FICO score affects the types of loan terms he or she will be offered. The higher a student's score, the better the interest rate. And a few points can make a big difference over the life of the loan. Take the example of $10,000 loan with no fees and a 15-year repayment term. Over its life, a borrower with a score of 723 will pay several thousand dollars less than a student with a FICO score of 619. (See figure below)

Where can I obtain a copy of my credit report?

There are three major credit bureaus that provide credit reports. Below are the credit bureaus and their contact info:

Equifax-800.685.1111 www.equifax.com
Experian-800.397-3742 www.experian.com
TransUnion-800.888.4213 www.transunion.com

Generally, there is a fee that associated with obtaining a credit report. However, you are entitled to receive up to one free credit report a year. A free credit report can be obtained at: www.annualcreditreport.com

What is the difference between tiered pricing versus individualized pricing?

Many traditional lenders utilize a "tiered pricing" model. Simply put, the tiered pricing model categorizes individuals with certain FICO scores into specific groups. The group that an individual falls into will determine the terms of his/her loan (i.e. interest rate, fees, APR). Generally, these individuals are grouped purposely so that they offset default risk. In contrast, individualized pricing model does not categorize individuals based on FICO and place them into groups. It provides loan terms (i.e. interest rate, fees, APR) specific to the individual's unique financial picture so that each individual receives the most equitable terms based on his/her credit score.

Are there fees charged?

The two most common types of fees that a lender might charge include: an origination fee and a repayment fee. An origination fee is a fee that a lender may charge to originate the loan. A repayment fee is a fee that a lender may charge prior to repayment. While such fees can vary, it is important for students to understand that a lender may use a fee to mitigate risk. Further, students should consider whether such fees can be added on top of the disbursement amount versus taken out of the disbursed amount. Lastly, regardless of whether you consider a private loan that has an associated fee, look to see if the fee is disclosed up front so that you may calculate the cost of funds associated with the loan.

What eligibility aspects should I look for as I explore a private loan product?

Eligibility aspects will very amongst private loan products. Typically, students should look for the most flexible product that will meet their individual needs while providing them the best price. Questions to consider concerning eligibility aspects that are student centric include:

Is satisfactory academic progress a requirement?
Must I be enrolled half-time to receive funds?
Is a co-borrower required to apply?
Does the product have a debt-to-income ratio?
May an international student apply for this private loan?
Can this private loan be used to cover past due balances?
May someone (parent or relative) have the option of taking the private loan in his/her name only?
Can this private loan be consolidated?

What are the types of borrower benefits I should look for as I consider a private loan?

Borrower benefits come in many shapes and sizes and are an accessory to a product. Many products on the market provide reduced interest rates for paying your monthly payment via auto debit and for making your loan payment on-time. However, look at private loan products, it is important to inquire about how you retain your benefits especially, interest rate reductions for making your monthly payment on-time. Generally, if you miss a payment; you might lose that specific benefit. Further, another benefit is the release of a co-borrower should you have to apply with one. There are private loan products that allow for releasing the co-borrower in as little as 24 months of on-time payments. While you consider these benefits, always continue to factor in price of the loan as cost of funds will determine of how much you will repay over the life of the loan regardless of whether or not you receive these added benefits.

Can private loans be deferred while a student is in school?

Yes. A deferment is a period of time during which the borrower, having met certain criteria determined by the lender or loan servicer on behalf of the lender, is not required to make regular monthly payments. Generally, most lenders allow students to defer the repayment of their private loan while the student is enrolled in school.

Can private loans be consolidated?

Yes. Private consolidation loan is single private loan created by combining existing private student loans into one new loan, or refinancing one existing loan under new terms. The private consolidation loan refinances the private student loans with a new interest rate and term. The borrower makes one monthly payment for the private consolidation loan that, in most cases, is lower than the monthly amount owed to the private loan holder(s). As you consider such a consolidation, it is typically not in the best interest to consolidate Federal Student loans with Private Loans as there are unique entitlements that come with Federal Student loans that can be lost.

What is a repayment term? What factors should I consider about the repayment term?

The repayment term is the timeframe during which payments of principal and interest are required. The repayment term follows any applicable in-school or grace period and excludes any periods of authorized deferment or forbearance. As you consider your repayment term, think about the number of years that you have to repay your loan. Typically, repayment terms range from 10 to 30 years. The longer the repayment term translates into more accrued interest that you will repay over the life of your repayment term. Thus, it is to your advantage to prepay on your loan as frequently as possible to shorten your repayment term so that you will save money.
(Add example for a $10K loan at 8.00% for a repayment term of 15 years versus 30 year

What is capitalization?

Capitalization is an increase in the principal balance of loan that occurs when a lender adds the interest accrued on the loan to the outstanding principal balance. Once capitalization has taken place, subsequent interest accrues on the new total principal balance. (Provide example of capitalization)

References:
Federal Student Aid Handbook
The Common Manual
The Greentree Gazette-Article by T.Briones on "The Top 4 Things You Should Know About FICO"
www.Bankrate.com
www.myfico.com
www.annualcreditreport.com