Comparing Private Financing Options

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Comparing Private Financing Options

• Presented By
• Rich Archibald, Bank of America

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Life Before Alternative Loans...
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Are you confused when it comes to comparing
alternative loans?
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Private Financing to you is

• Part of our job, the FA Office is proactive in
  creating a preferred lender list
• Something I discuss only when I have to
• Something I avoid at all costs
• Whats a private loan?

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Different strokes for different folks
? I dont care about the interest rate, I just
want to get my money fast!
? I dont care if it takes two months, I just
want to get the best interest rate!
? All I care is that the monthly payments are the
lowest possible!

• ? I want to pay a lower interest rate while Im
  in school,
• just like on my Stafford loan!

• I dont want to pay a fee!

? Ill pay a fee if the interest rate is lower!
? I want it all!!!
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So, whats the best loan out there?
1. Theres no one easy answer.
2. Theres no magic formula.
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Make sure you are comparing apples to apples
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Here are the apples to compare
1. Interest Rates and their components
2. Fees
3. Interest Capitalization
4. Repayment Terms
5. Annual Percentage Rate (APR)
6. Credit Criteria
7. Ease of Loan Process
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Interest rates their components
? What base index is the interest rate tied to?
? What does the index history indicate?
? What is the spread/margin over the index?
? Whats the bottom line on the rate Im paying?
? Will my spread remain constant over the life
of the loan?
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Current most prevalent indices in use today

• Prime Rate
• LIBOR

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Interest Rates Spreads
? What base index is the interest rate tied to?
? What does the index history indicate?
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10 Year Index Average
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Interest Rates Spreads
? What base index is the interest rate tied to?
? What does the index history indicate?
? How is the actual interest rate calculated?
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Interest Rate Calculations
Examples Index Spread
Interest Rate
Prime 7.25 0.50
7.75
LIBOR 4.00 3.75
7.75

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Interest Rates Spreads
? What base index is the interest rate tied to?
? What does the index history indicate?
? How is the actual interest rate calculated?
? Will my spread remain constant over the life
of the loan?
? Whats the bottom line on the rate Im paying?
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Loan Fees

• Dont get trapped, make sure you understand the
  complete fee structure of the loan you will be
  using before you use it.
• Up-front fees can range from 0 - 16.
• Fees are sometimes charged when a loan goes into
  repayment and can range from 0 - 6.5.

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Fee Table Based on a 10,000 Loan
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Interest Capitalization
? Dont get bitten by multiple capitalizations.
? Make sure you understand what interest
capitalization is and how it can be a
positive or negative loan feature.
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Questions to Ask
? Is interest capitalized frequently or once
at repayment?

• What interest rate will the capitalization
• be based on?

? If the loan contains a repayment fee will the
fee calculation be inclusive or non-inclusive
of any accrued interest that is to be
capitalized?
? Can interest only payments be made during the
in-school period?
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Capitalization Table
Examples Principal
Monthly Total Accrued
Interest Payments Payments
At Repayment 10,262 126
15,120
Interest 10,000
103 12,360 Payments
Assumptions 10K loan, 48 months deferred, 10
year amortization, 4.50 interest rate.
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Repayment Terms
?Are there multiple repayment options?
?Are there prepayment penalties?
? Is there flexibility in the total years it will
take to fully amortize the loan?
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Repayment Table
Assumptions 10K loan, 48 months deferred, 10
year amortization, 4.50 interest rate.
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The Bottom Line
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Credit Criteria

• Theres no crystal credit ball.
• Most lenders have easy to follow credit criteria,
  you just need to take the time to understand it.
• Typically, the better your credit history, the
  better pricing your going to receive.

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What are the lenders looking for?

• Willingness to repay
• Does the applicant have sufficient credit
  history?
• Has current and previous credit been handled as
  agreed?
• Do they meet the lenders bureau/credit score
  criteria?
• Ability to repay
• Does the applicant have sufficient income to
  handle new debt?

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The Loan Process

• Is the application straight forward easy to
  complete?
• What are the electronic capabilities?
• How long does it take to make a credit decision?
• Are credit exceptions ever considered?
• How long will it take to get a loan disbursed?
• Is the lender available when you need them?
• Can I talk to a real person?

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Summing It Up

• Why would you take on another task at an already
  busy office?
• Customer Service
• Improved Retention
• Lower Accounts Receivable
• Its the Right Thing to Do!

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Be informed and take the time to look at the
details that will result in an educated decision.
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Why?

• Why take on ANOTHER task in an already
• busy office?
• Customer Service
• Improved Retention
• Lower accounts receivable
• Because its the right thing to do!

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What methods can be used to help educate families
on financing options?

• Brochure outlining financing options
• Individual appointments - at orientation,
  publicized in office literature, listed on
  website, promoted by admissions
• Group sessions at orientation
• Notice with billing statement
• Use of email to prospective students, new
  students once deposited, current students
• Be creative! You know your students and campus
  best.

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A Schools Perspective
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Challenges

• Increased workload (all those certifications)!
• Need for additional counseling
• Anxiety about all the debt

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Solutions Detailed Lender List

• Include as much information as possible
• Lender contact information
• Eligibility/Attendance requirements
• Interest Rate/Fee information
• Repayment Options
• Suggested dates to apply by
• Cost of Attendance and explanation
• The more information, the better. Think of it a
  self-counseling tool designed to help students
  make the best possible decisions.

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Solutions Use Technology to Your Advantage

• Streamline your processes. Berklee uses a
  third-party website, so that instead of
  certifying loans on multiple sites, lenders send
  our certifications to one central place
• Electronic Loan Processing Berklee is in the
  process of setting up an import/export
  application, so that we will be able to certify
  loans directly in our Student System.

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Solutions Additional Counseling

• Include Alternative Loan Counseling as part of
  Entrance/Exit Counseling
• Send out yearly reminders summarizing private
  loan debt
• In FA publications, encourage students to speak
  with a counselor regarding credit/alternative
  loan debt
• Utilize lenders and guarantors to give debt
  management presentations

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Solutions Award Letter Supplement

• Award Letters include alternative loans
• All alternative loan borrowers receive a
  step-by-step guide explaining the alternative
  loan process

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End Result

• Families who have made good decisions about
  financing based on all the facts and
  opportunities.
• Financial Aid Officers that feel good about the
  job we do!