Private Student Loans Borrowing Trends and Future Implications

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Private Student LoansBorrowing Trends andFuture
Implications
Presented byJeffrey E. HansonAccess Group
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Borrowing Trends
Source The College Board, 2005
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Borrowing TrendsAccess Group

• Average amount borrowed/student
• Number of borrowers
• Changes in credit risk profile
• Default trends

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Impact of Growing Debt Burden

• Are we reaching a point where ability to pay
  outweighs willingness to pay?
• Can borrowers afford to repay all they have
  borrowed?
• Can borrowers achieve their financial goals,
  e.g., home ownership, providing for their family,
  retirement at some point?
• Are changes needed in loan terms and conditions,
  repayment options, etc.?

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Sample Out-of-School Budget How much will it
cost to repay loans?
Law School Graduate Case 1 Case 2 Case 3

• Total Borrowing 55,500 80,000 100,000
• Est. Cap. Interest/Fees 5,259 11,814
  17,164
• Est. Total Debt 60,759 91,814 117,164
• Est. Monthly Payment 745 1,010 1,226

• Assumptions Avg. Stafford Loan Borrowing
  55,500
• Repayment _at_ 8.25 for 10 years (745/month)
• Avg. Private Student Loan Borrowing 0
  24,500 44,500
• Repayment _at_ 8.25 for 20 years (0/month
  265/month 481/month)
• Standard payment plan, NO payment incentives

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Calculating Disposable Income
Case 1 Case 2 Case 3

• Annual Salary 60,000 60,000 60,000
• Monthly Salary 5,000 5,000 5,000
• Net Income 3,667 3,667 3,667
• Loan Payment 745
  1,010 1,226
• Credit Card Payment 100
  100 100
• DISPOSABLE INCOME 2,822 2,557 2,341

Will they have enough once they graduate?
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Monthly Discretionary Expenses
Case 1 Case 2 Case 3

• Housing 1,000 1,000 1,000
• Utilities 100 100 100
• Food 500 500 500
• Clothing
• Transportation 500 500 500
• Entertainment
• Health club, misc.
• Retirement 500 500 500
• Total 2,600 2,600 2,600

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Monthly Balance Sheet
Case 1 Case 2 Case 3

• Disp. resources 2,822 2,557 2,341
• - Disc. expenses - 2,600 - 2,600
  - 2,600
• SUBTOTAL 222 (43) (259)
• - Savings - ??? - ???
  - ???
• BALANCE ???

Deficit
Deficit
NOTE Budget should have a zero balance (0)
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What if . . .

• Starting salary is less than average?
• Credit card and/or other consumer debt exceeds
  amount assumed here (5,000)?
• Interest rates increase, thereby increasing
  minimum monthly loan payments?
• Borrower is living in higher cost urban area
  and/or has special financial needs?

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What can be done to help borrowers?

• Can payment terms be extended?
• Can payment options more closely mirror those of
  the federal loan programs?
• Can private loan consolidation become more
  widespread among lenders?
• How will Grad PLUS impact these trends?