Orientation To Student Loans

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Orientation To
Student Loans Presented By

Heather Lenker

American Education Services November 4, 2002

100 PM to 215 PM
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Overview

• Key Players
• Loans
• Interest Rates
• Help For Borrowers
• Industry Time Line
• Government and Guarantor Compensation
• Future Developments

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Key Players

• Students
• Post Secondary Institutions
• Banks and Lenders
• Guarantors
• Servicers
• Federal Government
• Secondary Market

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Key Players

• Students
• Most critical part of the puzzle
• Their need drives this industry

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Key Players

• Post Secondary Institutions
• Also known as colleges, universities, community
  colleges, technical and vocational schools.
• It is the cost of these institutions that prompt
  an aspiring student to secure funding for tuition
  and other expenses.

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Key Players

• Banks and Lenders
• National and local banks as well as, Credit
  Unions and SLs.
• Provide funding to students to pay for the cost
  of post secondary education.

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Key Players

• Guarantors
• Offer guarantee to loan owners that they will
  repay the student loan debt in the event of the
  borrowers death, disability, bankruptcy or
  default
• Establish the due diligence regulations loan
  owners must follow to maintain the guarantee
• Guarantors may charge a guarantee fee to generate
  funds

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Key Players

• Servicers
• Contracted by loan holders to manage their
  student loan portfolios
• Experts on industry regulations
• Responsible for maintaining healthy due diligence
  on the loan owners portfolio
• Responsible for preserving the loans guarantee

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Key Players

• The Federal Government
• Regulates the entire student loan industry
• Negotiates and upholds regulations to protect
  student loan borrowers
• Pays loan owners and guarantors special allowance
  and interest subsidy to make up for interest lost
  in making low rate student loans
• Enables the student loan industry to be
  beneficial to all parties involved

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Key Players

• Secondary Market
• Created by the Federal Government to assist
  lenders, needing capital, to continue making
  loans
• Student loans have a very long term, resulting in
  large time frames before the lender sees return
  on their investment
• Issues bonds to generate funds to help lenders
• The sale of these bonds generate revenue used to
  purchase more loans, thus freeing up lender
  assets to make more loans.

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Loans

• Subsidized Stafford
• Unsubsidized Stafford
• PLUS
• Federal Consolidation
• SLS
• Private and Alternative Loans

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Loans

• Subsidized Stafford
• Need Based
• Six Month Grace Period
• Government pays the interest during enrollment,
  grace period, and periods of deferment
• 10 year repayment term
• No pre-payment penalty

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Loans

• Unsubsidized Stafford
• NOT Need Based
• Six month grace period
• Government NEVER pays ANY interest
• 10 year repayment term
• No pre-payment penalty

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Loans

• PLUS
• Parental Loan For Undergraduate Students
• Available to natural, adoptive, or step parents
• NOT need based
• Government NEVER pays ANY Interest
• Has NO grace period
• 10 year repayment term
• No prepayment penalty

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Loans

• Federal Consolidation
• New, single loan comprised of other existing
  loans
• Government will pay the interest during
  enrollment, grace period and deferment periods on
  SUBSIDIZED FEDERAL CONSOLIDATION LOANS only
• Repayment terms vary depending upon balance
• No pre-payment penalty

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Loans

• SLS
• Supplemental Loans for Students
• Discontinued in 1994absorbed into the STAFFORD
  programs
• Government NEVER pays ANY interest
• No grace period
• 10 year repayment term
• No prepayment penalty

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Loans

• Private and Alternative
• Targeted to specific occupational schooling, such
  as medical, chiropractic, dental, legal, and
  nursing fields of education
• Can be school based
• May be self insured or privately guaranteed
• Limited Deferment and Forbearance Options
• Higher Costs
• Most are non-subsidized
• Approximately 70 different loan programs

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Interest Rates

• Special Allowance
• Fixed Interest Rates
• Variable Interest Rates

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Interest Rates

• Special Allowance
• Established as a result of the low interest rates
  on Student Loans
• Payments made by the Federal Government to
  Student Loan loan owners
• These payments ensure that a student loan earns
  as much, but not more, than a consumer loan.
• Special Allowance is calculated each quarter,
  determined by the sale of the 91-day T-Bill

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Interest Rates

• Variable Interest Rates
• Student loans became variable in 1992
• May Change each July based upon the price of the
  T-Bill
• Capped at 8.25
• Fixed Interest Rates
• Prior to 1992 interest rates were fixed at 7, 8
  or 9 for the life of the loan
• In 2006 it is projected that Student Loan
  interest rates will become fixed at approximately
  6.8 for Stafford Loans and 7.9 for PLUS Loans

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Help for Borrowers

• Deferments
• Forbearances
• Administrative Forbearances
• Mandatory Administrative Forbearances
• Various Repayment Schedules

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Help for Borrowers

• Deferments
• A temporary suspension of repayment that may be
  granted under circumstances authorized by the
  Federal Government
• Eligibility based first upon loan disbursement
  dates
• Borrowers must provide required documentation for
  verification of eligibility
• For Subsidized Stafford and Subsidized Federal
  Consolidation Loans, the Federal Government will
  pay the interest on the loan during any and all
  deferment periods

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Help for Borrowers

• Deferment Examples
• In-School Deferment
• Unemployment Deferment
• Economic Hardship Deferment
• Public Service Deferment
• Graduate Fellowship Deferment
• Rehabilitation Deferment
• Teach Shortage Deferment
• Internship/Residency
• Working Mother Deferment
• Parental Leave Deferment
• Temporary/Total Disability Deferment

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Help for Borrowers

• Deferment Eligibility Chart
• On the following page, you will find a copy of
  the Deferment Eligibility Chart from the
  September 2002 edition of the Common Manual.

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Help for Borrowers

• Forbearance
• Temporary suspension of payments, allowing for an
  extension of time to make the regularly scheduled
  payment or temporarily accept a smaller payment
  than previously scheduled.
• Forbearance is used when a borrower is not
  eligible for a deferment
• The borrower is ALWAYS responsible for interest
  while on forbearance

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Help for Borrowers

• Administrative Forbearance
• Used by loan owners and servicers for certain
  circumstances. This type of forbearance can be
  approved without the borrowers signature
• Natural Disasters
• Closed School or False Certification
• Loan Sale or Transfer
• Loan owner or servicer can make the determination
  to approve this forbearance type based upon the
  borrowers unique situation

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Help for Borrowers

• Mandatory Administrative Forbearance
• The loan owner is not required to notify the
  borrower or endorser at the time this forbearance
  is granted
• Local or National Emergency
• Military Mobilization
• Disaster
• The Federal Government will notify the loan
  owner/servicer of the situation and the
  appropriate borrower demographics affected.

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Help for Borrowers

• Repayment Schedules
• Repayment Schedules are the method by which a
  borrowers payments are derived.
• Standard Repayment Schedule
• Graduated Repayment Schedule
• Income Sensitive Repayment Schedule

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Help for Borrowers

• Repayment Schedules
• There are other multiple repayment schedules
  available. Each owner or servicer may have their
  own unique schedules to offer borrowers.
• Standard Repayment Schedule
• Payments are the same each month but may be
  adjusted each year to reflect the variable
  interest rate. Total repayment schedule is 10
  years.

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Help for Borrowers

• Repayment Schedules
• Graduated Repayment Schedule
• You make smaller monthly payments early in the
  repayment schedule and larger payments later in
  the schedule. Total repayment schedule is 10
  years.
• Income-Sensitive Repayment Schedule
• Loan payments are based on your monthly income.
  Total repayment term may be extended beyond 10
  years.

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Help for Borrowers

• Back End Benefits
• Borrowers may receive an interest rate reduction
  for the following reasons
• Using Electronic Funds Transfer to make monthly
  payments
• Keeping loans current

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Industry Timeline

• Early 1900s
• 1940s
• 1950s
• 1960s
• 1970-2002
• Future

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Industry Timeline

• Early 1900s
• Industry
• Steel
• Farming
• Store or Office Clerk
• Required knowledge for the average person was
  minimal
• Only the wealthy attended post secondary
  schooling
• Automation
• Fountain Pens
• Ledgers
• Filing Drawers

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Industry Timeline

• 1940s
• With WWII came great innovation
• Predecessors to the computer
• Transistors
• Office Automation
• Agricultural Automation
• Automation created a need for better educated
  workers.

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Industry Timeline

• 1940s
• GI Bill
• Paid for an Ex-GIs post secondary education
• Provided a stipend for living expenses
• Produced some of the best educated people America
  had ever seen

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Industry Timeline

• 1950s
• Children of Ex-GIs want the same post secondary
  education their parents received
• Parents cant afford tuition and banks wont lend
  to someone with no credit, no job and no
  collateral
• The nations young people are faced with a
  serious dilemma
• How will this new generation pay for schooling?

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Industry Timeline

• 1950s
• Massachusetts group forms a non-profit
  organization to receive monetary gifts and bank
  investments
• This money is offered to loan owners as a
  guarantee of repayment in return for making loans
  for students
• Because of the decrease in risk created by this
  guarantee many banks begin offering student
  loans
• The first Guaranteed Student Loan is made on
  March 15, 1957

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Industry Timeline

• 1960s
• By 1965 there are 21 states with Guarantee
  Agencies
• A national guarantor is also established
• College financing is better than ever before

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Industry Timeline

• 1960s
• Hurdles to Overcome
• Many areas of the country still did not have
  access to a guarantor
• Each state run guarantor has their own set of
  unique procedures
• Money is limited in some guarantee programs
• Solution?
• Enlist the guidance of the Federal Government

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Industry Timeline

• 1960s
• The Higher Education Act of 1965
• More Funding for Guarantors
• More lender participation
• Easier access to Student Loans
• Uniform due diligence regulations

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Industry Timeline

• 1960s
• The Higher Education Act of 1965
• Provisions
• Program Implementation
• Universal Funding
• Interest Subsidy
• Minimal Federal Due Diligence regulations
• Congressional Reauthorization every five years

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Industry Timeline

• 1960s
• The Higher Education Act of 1965
• Provisions
• Program Implementation
• This act mandates the implementation of insured,
  low interest federal, state and private loan
  programs available to students in approved
  institutions of higher education, anywhere in the
  country.

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Industry Timeline

• 1960s
• The Higher Education Act of 1965
• Provisions
• Universal Funding
• This act provides for the commitment of federal
  funds to ensure universal availability, no matter
  what the regions socioeconomic status.

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Industry Timeline

• 1960s
• The Higher Education Act of 1965
• Provisions
• Interest Subsidy
• This act mandates that the federal government
  will pay all interest on the students loans
  while in school, during grace or on deferment.
  Initially, the government paid a portion of the
  interest during the borrowers repayment period,
  but that practice was soon discontinued.

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Industry Timeline

• 1960s
• The Higher Education Act of 1965
• Provisions
• Minimal federal due diligence regulations
• This act authorizes minimal federal due diligence
  regulations. A guarantor may require stricter
  guidelines, but may never require less than the
  federal government.

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Industry Timeline

• 1960s
• The Higher Education Act of 1965
• Provisions
• Congressional Reauthorization every 5 years
• The practice of re-passing the Higher Education
  Act occurs because the act was first viewed as an
  experiment. Reauthorization is beneficial
  because is promotes growth and change within the
  industry.

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Industry Timeline

• 1970 to Present
• The Higher Education Act of 1965
• Amendments
• Secondary Market
• Deferments and Forbearances
• Federal Reinsurance
• Standards used to determine loan amounts
• Special Allowance

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Industry Timeline

• 1970 to Present
• The Higher Education Act of 1965
• Amendments
• Secondary Market
• Established in response to the long period of
  time before students are required to begin
  repayment on their loans. Lending institutions
  were not seeing a return on their investment fast
  enough to be able to generate new loans
• Congress established secondary markets in each
  state as well as a national secondary market The
  Student Loan Marketing Association

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Industry Timeline

• 1970 to Present
• The Higher Education Act of 1965
• Amendments
• Deferments and Forbearances
• The federal government came to the realization
  that unexpected circumstances may prohibit a
  borrower from being able to repay their loans for
  a period of time

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Industry Timeline

• 1970 to Present
• The Higher Education Act of 1965
• Amendments
• Federal Reinsurance
• Added to help guarantor agencies
• Gives the guarantor the ability to bill the
  federal government for a portion of the funds
  paid to the loan owner on a defaulted loan

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Industry Timeline

• 1970 to Present
• The Higher Education Act of 1965
• Amendments
• Standards Used To Determine Loan Amounts
• A student who demonstrates a certain level of
  need may be awarded a subsidized loan
• A student with less need will be awarded an
  unsubsidized loan

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Industry Timeline

• 1970 to Present
• The Higher Education Act of 1965
• Amendments
• Special Allowance
• Established in response to a decline in lender
  participation
• Allows student loans to be as lucrative a
  business as consumer loans

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Industry Timeline

• 1970 to Present
• The Higher Education Act of 1965
• Research Online
• If you are interested in more changes made to the
  Higher Education Act of 1965, please visit the
  Common Manual, Section H, History of Federal
  Education Loan Programs and The Common Manual
• www.NCHELP.org
• E-Library
• 7 Manuals
• Common Manual

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Government and Guarantor Compensation

• Origination Fees
• Previously 5.5 of the loan
• As of 7/1/94, 3 of the loan
• Charged by the lender and forwarded to the
  Federal Government to defray costs
• Guarantee Fees
• determined by the individual Guarantors
• Previously not to exceed 5
• As of 7/1/94, not to exceed 1
• Charged by the lender and forwarded to the Loans
  Guarantor to defray costs

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Future Endeavors

• E-Commerce/Communications
• Continued Initiatives
• Websites
• E-mail Correspondence
• Chat Sessions
• IP Voice Over
• Online Forms and Applications
• Online Payment Options
• Electronic Funds Transfer

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Future Endeavors

• Self Certifying Deferment Forms
• Eliminating the need for a borrower to obtain
  authorized signatures on a deferment form will
  cut down on application time. It may also make a
  borrower more willing to apply for deferment when
  needed.
• Decrease in delinquency
• Decrease in defaulted loans

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Thank You For Your Interest In The
Student Loan Industry