Comparing Private Loans: Determining the Real Bottom Line

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Comparing Private Loans Determining the Real
Bottom Line
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• Presented by
• Larry Miller
• Nelnet Private Loan Solutions
• Tom Patterson
• Nelnet Campus Solutions

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Private Educational Credit

• Fund education costs above aid and beyond
  available family resources
• Not federally insured (may be privately insured)
• Closed-end consumer credit (unsecured loan)

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Private v. Federal - differences

• Private Loans
• Financing tool
• Terms set by lender
• State and federal regulatory requirements
• Credit dependent

• Federal Loans
• Financial aid
• Terms set by government
• Regulatory exemptions
• Credit blind

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Private v. Federal - similarities

• Obligation to repay/promissory note
• Ease of application/access to funds
• Important piece of higher education financing
  puzzle
• Contribution to overall indebtedness

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Private Loan considerations

• Credit underwriting determines approval, fees,
  terms, limits
• Terms vary by product, lender, school and time
  period
• Marketing/advertising subject to consumer lending
  regulations

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Underwriting Factors

• Credit score (FICO)
• Credit history
• Assets
• Income/Debt-to-income
• Field of study, school, grades (earning
  potential)
• Co-borrower, co-signer, co-maker

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Credit terms

• Fees (application, origination, disbursement,
  repayment, late payment)
• Interest basis LIBOR, Prime, other
• Borrowing limits annual, aggregate
• Borrower incentives/benefits

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Fees

• Impact on Annual Percentage Rate (APR)
• Reduce/avoid with a co-applicant
• upfront v. repayment
• Accrued or deducted
• Budgeting/long-term cost

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Interest basis

• Libor London Interbank Offered Rate
• Prime bank to consumer lending rate
• Frequency of adjustment (month-quarter-annual)
• Spread over index

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LIBOR v. Prime
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LIBOR v. Prime
LIBOR is the three-month average of the
one-month LIBOR rate, adjusted quarterly
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Introducing APR

• Truth-In-Lending Act/Reg Z
• Cost of credit to the borrower in relation to the
  amount borrowed
• Common language for product comparison

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Calculating APR

• Actuarial v. U.S. Rule methods
• Full-term v. two-part disclosures
• Complex calculations
• Inputs
• Disbursement Dates and Amounts
• Payment Dates and Amounts
• Assessment and payment of Fees
• Timing and Amount of transactions

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Typical Programs

• High-level assumptions
• 10,000 loan
• Principal and Interest deferred for 52 months
  (includes 6-month grace)
• Maximum Repayment Period is 240 months
• Other inputs payment amount/frequency, interest
  rate changes, etc.

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APR Comparisons

• With no fees
• LIBOR (5.32) margin (2.75)
• Full-term APR 7.66
• Prime (8.25) with no margin
• Full-term APR 7.82

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APR Comparisons

• With a 2 origination fee
• LIBOR (5.32) margin (2.75)
• Full-term APR 7.83 (up by 0.17)
• Prime (8.25) with no margin
• Full-term APR 7.99 (up by 0.17)

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• Other methods of comparison
• Proprietary
• Third-party evaluations
• Are sponsored sites objective?
• Big Picture

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Resources

• Regulations
• WWW.GPOACCESS.GOV
• Industry Analysis
• Student Loan Servicing Alliance (SLSA)

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• Questions?

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Thank You!
Larry Miller Nelnet Private Loan
Solutions 402.458.2252 Larry.Miller_at_Nelnet.net
Tom Patterson Nelnet Campus Solutions 888.465.617
1 tom.patterson_at_nelnet.net