Alternative Loans Best Practices for Financial Aid Offices SUNY Directors’ Meeting December 7, 2005 Stephen G. Brown Fordham Law.

Alternative Loans Best Practices for Financial Aid Offices

SUNY Directors’ Meeting

December 7, 2005

Stephen G. BrownFordham 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 ??!!

Wait a minute – How about PLUS ?! Good point!

What is a private educational loan? Are they for my students?

For my school? What do I need to know? 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 www.annualcreditreport.com

Credit Reporting Agencies

Experian www.experian.com

Trans Union www.transunion.com

Equifax www.equifax.com

“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 – www.finaid.org 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. BrownAssistant DeanFordham University School of LawNew York, NY 10023212 [email protected]