Changing the Conversation –
Home Equity, Federal and Private Loans
Leslie Bembridge, Vice-President
Product Management, Education Finance
It Started with a Discussion on Student Debt
It's not surprising that student loan debt remains
a problem child. College prices continue to defy
inflation rates and the biggest percentage price
hikes are coming from public universities, which
is where most middle and low-income students
have traditionally depended upon for bachelor
degrees.
2
It Quickly Moved to a Discussion of Student Loan
Lenders and Consumer Protection
Colleges and Universities are Feeling the Heat
The Dodd-Frank Wall Street Reform and
Consumer Protection Act requires the
Director of the Consumer Financial
Protection Bureau and the Secretary of
Education to submit a Report on private
student loans. (Issued August 2012)
3
Then the Discussion Moved to the Cost of College
Colleges and Universities are Feeling the Heat
From Customers . . .
o
May 2011 – a majority of Americans (57%) say the higher education system in
the United States fails to provide students with good value for the money they
and their families spend. An even larger majority—75%—says college is too
expensive for most Americans to afford. At the same time, however, an
overwhelming majority of college graduates—86%—say that college has been a
good investment for them personally. (Pew Research Center)
From Congress . . .
o
October 2011 – all colleges and universities required to have a Net Price
Calculator available on their web sites so students can receive a more accurate
estimate of the real costs of college
From the Administration . . .
o
February 2012 – White House Unveils College
Scorecard. . .a new tool to the College Affordability and
Transparency Center that assists prospective students
and their families in comparing colleges before they
choose using key measures of college affordability and
value. The purpose of the tool is to make it easier for
students and their families to identify and choose highquality, affordable colleges that provide good value.
4
The Conversations are changing…
Like all things in the world of student financial aid,
nothing really lasts forever….
As we look ahead to the 2013-14 academic year,
financial aid officers will be more challenged than
ever to review the offerings of private loans in
comparison to Direct PLUS, Graduate Stafford and
Home Equity loans and ask the question;
“Are federal loans really the best deal for all students
and families?”
5
Why Borrow Beyond Stafford Loans?
• Need to borrow for Expected
Family Contribution (EFC)
• Need to borrow to fill gap left
over after financial aid is
awarded
• Student did not (or will not)
apply for financial aid
6
Current State of Graduate Stafford Loans
 Loans with a loan period beginning on or after 7/1/12
o Fixed rate of 6.8%
o No Subsidies
o Annual and Aggregate limits still the same
 Lost repayment incentives
o No origination fee discounts
o No upfront interest rebate provided at the time of the
loan disbursement
o Total fees 1%
7
The New Cost of Stafford Loans
The Department of Education is projected to save $18
billion over the next 10 years.
The loss of the interest subsidy to a full-time graduate day
student who borrows for the first time in 2012-2013 and
was eligible for $8,500 in the past would be about $2,800
term time and $900 in grace period (total $3,700).
The additional interest costs for four-year graduate evening
students would be about $4,800 term time and $1,200 in
grace period ($6,000). …the interest is capitalized on the
loans, so borrowers will also be paying interest on the
higher amount of their loans.
8
Federal PLUS Loan Credit Changes
Borrower cannot have adverse credit, but if they have
no credit they can be approved
 In the Spring of 2012 the Department of Education
modified credit criteria for PLUS to now include unpaid
collection accounts and charge-offs as part of the
credit review
 Items such as being 90 days delinquent on any debt as
well as bankruptcy discharges, foreclosures and wage
garnishments during the previous five years are now
trigger denials for many who may have been approved
in 2011-12
9
Federal PLUS Credit Standards
 No debt-to-income ratio requirements
 The parent cannot be released from the obligation or
legally transfer the loan obligation to the student
 Endorser can be obtained, cannot be the student in
the case of a parent borrower
 Credit is evaluated each year
10
Federal PLUS Current State of Rates and Fees




Lender is the Federal Government
4% loan origination fee
Fixed interest rate of 7.9% for the life of the loan
.25% Interest Rate Reduction when payment is made
through Auto-Pay
1.5% of Principal Loan Amount rebated after 12 consecutive
on-time monthly payments (eliminated July 1, 2012)
11
The New Cost of PLUS Loans
The Department of Education is projected to save $3.6
billion over the next 10 years.
The most obvious result of this is that a borrower who
borrows $20,500 will now receive $20,295 and a borrower
who borrows $40,000 GradPLUS will now receive
$38,400.
Borrowers who choose to repay the loans electronically may
still qualify for the 0.25% interest rate reduction for
electronic loan payments.
12
Federal PLUS Benefits
• Cancellation due to death of
borrower or student (in the case
of a parent borrowing)
• Cancellation due to permanent
disability of the borrower
• Identity Theft Cancellation –
effective July 1, 2006
• A graduate PLUS borrower
may receive a deferment while
enrolled in school at least halftime.
•A parent borrower may receive a
deferment for a PLUS Loan
based on his/her own half-time
enrollment or they can defer
repayment of PLUS Loans while
the student for whom you
obtained the loan is enrolled at
least half time.
•The parent must separately
request each deferment period.
•If no deferment is selected the
loan begins repayment 60 days
after disbursement.
13
Federal PLUS
Repayment Options
 10-25 year repayment term
o Standard, Extended or graduated repayment
terms
o Unemployment and Economic Hardship
Deferments
o No prepayment penalty
 Federal Loan Consolidation program exists to extend
repayment up to 30 years depending on loan balance.
 Tax Benefits
o “Speak with your tax advisor”
14
In the News
As the cost of college has spiraled ever upward and
median family income has fallen, the loan program,
called Parent PLUS, has become indispensable for
increasing numbers of parents desperate to make their
children’s college plans work. Last year the
government disbursed $10.6-billion in Parent PLUS
loans to just under a million families. Even adjusted for
inflation, that’s $6.3-billion more than it disbursed back
in 2000, and to nearly twice as many borrowers.
15
The U.S. Department of Education doesn’t know how many parents
have defaulted on the loans.
It doesn’t analyze or publish default rates for the PLUS program with
the same detail that it does for other federal education loans.
It doesn’t calculate, for instance, what percentage of borrowers
defaulted in the first few years of their repayment period….For
parent loans, the department has projections only for budgetary—
and not accountability—purposes:
It estimates that of all Parent PLUS loans originated in the 2011 fiscal
year, about 9.4 percent will default over the next 20 years….
The analysis, by Mr. Kantrowitz, uses survey data from 2007-8, the
latest year for which information is available. Among Parent PLUS
borrowers in the bottom 10th of income, monthly payments ate up
38 percent of their monthly income.
16
Alternative Loans Borrower Eligibility
 Student may be the borrower
 Co-signer does not have to be a
parent
o Other persons may borrow or cosign
 International student options
o Typically need US Citizen or
Permanent Resident as a co-signer
 Typically need to be enrolled in
a degree program at least halftime but also offers options for
less than half-time students
17
Alternative Loans Credit Review
 Credit criteria established by the lender
 The presence of a co-signer almost guarantees
a lower interest rate
o Co-signer release available with most lenders
 Income verification and DTI more likely to be
required
 Credit/FICO Scores are one piece of the criteria
for approval
 Low-Doc or No-Doc Loans for high credit scorers
may be a possibility
18
Alternative Loans
Interest Rates and Fees
 No Fees (most companies)
 Fixed Rates
o Citizens Bank TruFit Student
Loan starts at 5.75%
 Variable Interest rates
o Citizens Bank TruFit Variable
Rate starts at One-Month LIBOR
+ 2.50%
 What are the rates at your school?
19
Alternative Loans Features
 Borrower chooses repayment option
o Immediate, Interest-only or Deferred
 Interest rate reduction for automatic payments from an
account
o .25% up to .50% is the most common
 Benefits for already being a customer
 Loan forgiveness
 Cover past due balances
 School Certified
 Tax benefits
 Forbearance options
 Repayment terms 5-20 years
20
Status of Alternative Loans
In the years after the credit crisis, department officials point out, other
means of financing college— such as home-equity loans and private
student loans—have become harder for families to get.
21
Home Equity Loan/Lines
 Not regulated by Title IV Regulations
 Terms and Conditions vary greatly among lenders
 Borrower Eligibility
o You must be the home owner
 Interest Rates
o Fixed or Variable
 Based on credit criteria established by the lender
 Income verification and debt-to-income ratios more likely
to be required
 Low-Doc or No-Doc Loans for high credit scorers
22
Home Equity
 Loan Limits
o Equity in home directly impacts amount borrowed
 Loan Fees
o Origination, Appraisal, Closing Costs
 Not federally insured against disability and death
Funding Education with Home Equity Loans
…a home equity loan -- otherwise known as a
second mortgage -- may also be a better
solution than some of the federal student loan
programs as well. If you can deduct your
mortgage interest at tax time, your effective
interest rate on a home equity loan could be less
than that of a PLUS or even a Stafford loan.
23
HELOC or Loan?
For flexibility, a home equity line of credit (HELOC) can't
be beat. You can tap into it as needed to pay for tuition
as well as other expenses, and only pay interest on the
amounts advanced.
However, there are a couple of caveats: first, mortgage
lenders can shut down credit lines if home values ...
Second, HELOCs come with variable interest rates,
meaning 10 years from now, that education could prove
very expensive if rates increase.
That said, a fixed-rate second mortgage delivers the entire amount in
one lump sum, and you must begin paying it off right away. Your lump
sum can't be cut, and your payment is attached to a fixed rate. One
way of splitting the difference is to get a HELOC that allows you to fix
the rate at one or more points during the life of the loan.
24
Families will go to where the need is, and that’s the
Financial Aid Office
 Provide loan counseling advice
 Know the lenders and their products
o Create a list so you can talk about it
 Know why the products are on your list
 Advise the family to create a “pros and cons” list
25
Loan Features to Consider
•Borrower Eligibility
•Loan Payment and Terms
•Payment Insurance
•Interest Rate and Caps
•Loan fees; origination, repayment, appraisal, “closing costs”
•Approval Criteria
•Application Process
•Deferment and Repayment Options
•Loan/Borrowing Limits
•Tax Benefits
•Pre-payment Penalties
26
Questions to Consider
Have you applied for financial aid and looked for outside
scholarships?
Can you manage a monthly payment plan to finance a
portion?
Who will be doing the primary borrowing?
Should you share the borrowing?
What affect does this have on other family plans?
What are short and long term goals of family, student?
Is smallest monthly payment most important?
Is lowest interest rate important?
Are low origination fees important?
Are the tax benefits most important?
What is your FICO Score? (myfico.com)
27
The Tradeoff’s







Interest Tax Deductions
The responsible party (student, parent, both?)
In-school Deferments
Interest rates
Loan term
Availability
Default Impacts
28
Sources
Slide 8 &12:
Implications of the Budget Control Act of 2011. Volume 43 Issue 1, by Stephen
Brown, Assistant Dean, Fordham University School of Law
Slide 15, 16 & 21:
chronicle.com, October 12, 2102 Volume LIX, Number 7
Slide 21 & 31:
http://trends.collegeboard.org/student_aid/report_findings/indicator/Overview_of_L
oans
Slide 23 & 24:
http://library.hsh.com/articles/home-equity/student-loans-vs-home-equity-loans
29
Appendix
30
Federal PLUS Loans
Pros
• Parent is the borrower for
undergrad students, Graduate
students for GPLUS
• Death, disability, identity theft
cancellation
• Fixed/Capped interest rate
• Economic Hardship and
Unemployment Deferments
• In-school Deferment based on
borrower’s enrollment
• For those with poor credit, often
best option
Cons
• No shared debt burden
with student (undergrad)
• Ten year term
• Fixed rate of 7.9%
• 4% origination fee
• Higher rate than fixed
private loans for high
credit scores
31
Alternative Loans
Pros
Cons
• Lower rates for some
• Parent acts as co-signer
with possible release
• Student establishes credit
• Longer repayment terms
• Shared responsibility
• 0 fees (in many cases)
• More debt burden on student
• Rates and fees may vary
• Longer term means more interest
• Can’t be consolidated into a
federal loan
32
Home Equity Loans
Pros
• Secured loan
• Interest is tax
write-off
• No school
certification
• Low rates
Cons
•
•
•
•
•
•
•
•
•
Reduces asset
More difficult to get approved
Application fees may be higher
Many do not have death/disability
cancellation benefits
Closing costs
Market sensitive limits - equity
Longer term means more interest
Higher interest rate caps
Failure to repay the loan may jeopardize
home ownership
33
34