|  | Higher Education Perspectives | Overture Technologies' Education Finance Blog | |
Thoughts and analysis on education financing for lenders,
colleges, universities and students, including financial aid and student
loans.
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| | April 22, 2009 | | With award letters on their way, many students are determining how to pay for their educations. How can they find private loans that they can afford to repay after graduation? | Having recently graduated from college, many of my friends are starting to return to school for their graduate degrees. When they receive their acceptance letters, the first thing they do is carefully read everything in the admissions and financial aid packets cover-to-cover. Ok, so maybe not. However, once the celebration is over, they get down to business and begin to worry about how to pay for two to four more years of school without being saddled with debt for the rest of their lives. This is when my phone rings.
The calls from friends seeking advice on finding good student loans for themselves or undergraduate siblings tend to start in mid-March and continue through September. The conversation is always the same: How-are-you-I’m-great-say-hello-to-your-family-for-me-and-oh-by-the-way-(deep breath)...where can I get a loan for school that I can actually afford? At this point, it’s my turn to take a deep breath and attempt to explain the often baffling financial aid process.
After ensuring that they have followed the basic steps of financial aid, from filling out the FAFSA to maximizing grants, scholarships, work-study and federal loan options (including PLUS/Grad PLUS if they can), the conversation shifts to filling their aid gap with private loans. At this point, I always advise my friends to consider all available private loan options. Why? Because the wide range of potential rates out there is staggering!
Tim Ranzetta of Student Lending Analytics recently applied as a co-signer for private loans from six different lenders (Wells Fargo, Chase, Citibank, Sallie Mae, Discover and SunTrust) – and found that “the range of interest rates they offered [him] varied from 7.0% to 12.125%.” That’s a spread of over five points – enough to make a difference of thousands of dollars over the life of a loan.
Given this great disparity in potential rates, what is a borrower to do? Apart from reconsidering their choice of college, they can take control of their situation by shopping around for private loans. It is more important than ever for borrowers to be fully informed of their options before taking out a private loan. With FICO recently announcing that shopping around for student loans within a reasonable timeframe will have little to no impact on credit scores, the time has never been better for students to make the extra effort and save themselves some money.
So how do my friends react when I tell them to start shopping? They usually groan and semi-sarcastically thank me, realizing that I’ve both given them good advice and created a lot of extra work for them. Fortunately, I will soon be able to help them solve that problem when Overture launches the Student Loan Marketplace, our new service that will provide borrowers with a comparison of reliable private loan products and terms from multiple lenders. To learn more about the Marketplace and how it can benefit your students, take a look at our press release or our product web site today!
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| | April 07, 2009 | | While APR has traditionally been emphasized as an easy way to compare loans, does it truly help students understand their options enough to make an informed decision? | The Federal Reserve has recently posted revised disclosure requirements for private student loans and is requesting commentary and suggestions for changes to the disclosure requirements. One area the Fed is looking into is the display of the Annual Percentage rate (APR) and interest rate. It has been determined that prominently displaying both the interest rate and the APR causes confusion among consumers, as they are often unaware of the difference between the two rates and believe it is an error to display two different rates. This begs the question of which rate is more descriptive and helpful to consumers, and thus should be more prominently displayed.
APR is a good tool for comparison between loans with similar terms, repayment options, and grace periods. When these variables are held constant, APR accurately compares the cost of the loans based on the interest rates and fees. Unfortunately, these variables are not held constant for students shopping for loans. The variety in repayment plans offered to students largely invalidates APR’s ability to accurately compare various loans.
The various repayment types offered for student loans are the biggest pitfall for using APR as a comparison tool. In some cases, students are allowed to defer principal and interest for up to 8 years, which extends their loan term while leaving the repayment period constant. This strategy can drop the APR below the interest rate, but simultaneously increases the loan’s total cost by leaps and bounds. An immediate repayment loan would have significantly higher APR, and yet much lower total cost.
Full deferment isn’t the only repayment option that is misleading. Making interest-only payments while in school will reduce the APR shown to students while increasing the total cost. The table below shows calculations for APR and total cost for the various repayment types (scenario is set for a freshman in a four-year institution taking a $10,000 loan). The trend clearly shows the how misleading APR can be – while APR decreases, the total cost rises.
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Repayment Type
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Interest Rate
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APR
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Total Cost
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Immediate Repay
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8.05%
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8.75%
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$21,209
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Interest Only
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8.05%
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8.64%
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$24,740
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Full Deferment
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8.05%
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8.04%
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$28,893
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Based on these examples of total cost rising and APR falling due to some loan attributes, it is hard to argue that APR is a qualified comparison tool to be used for shopping for a private student loans.
While there would be substantial benefits to ending the use of APR for the comparison of private student loans, there are also some side effects to be considered. In my next entry, I will examine the effects of not prominently displaying APR and how it would change the shopping experience for students who need a private loan.
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| | April 03, 2009 | | By de-duplicating student loan inquiries made within 30 days, borrowers' FICO scores are protected while they shop | The higher education industry has been concerned for some time about a potential peril facing students who apply for private student loans. Ron Lieber of the NY Times wrote a thoughtful article on the topic last summer.
Students looking to shop for the best possible rate for their private student loan face a dilemma. The student needs to apply with an individual lender to obtain the full terms (interest rate, fees, benefits, etc.) of their loan. Lenders use a credit report and FICO score (provided by FICO, fka Fair Isaac Corporation) to determine the borrower’s risk and price their loan accordingly. Each time a lender accesses the student’s credit report, the credit bureau keeps track of that “inquiry.” The problem is that the FICO score is based, in small part, on the total number of inquires that have been made to a borrower’s credit report. So there was a potential risk that by shopping around to multiple lenders, the borrower was accumulating inquiries which might consequently ding their FICO score, possibly resulting in worse loan terms.
Well there is good news on this front. Fair Isaac released guidance on this topic on their MyFICO website.
FICO now affords student loans the same “shopping treatment” as mortgages and auto loans. As long as a lender has tagged their credit inquiry as a student loan, FICO will de-duplicate any student loan inquiries made within the prior 30 days. Therefore as long as a student has done their shopping with a 30 day period, there should be no impact on their FICO score and thus no impact on their loan terms.
To read another take on this new development, visit Tim Ranzetta at the Student Lending Analytics Blog by clicking here.
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