1. MASFAA 2013 October 6 th – 9 th, 2013 Indianapolis, Indiana Pit Stop: What you should know about private loans Angela Karlin, Director, Student Financial Services, University of Central Missouri Mindy Hager, Regional Director, Central and South, First Marblehead

2. Disclaimer This presentation is for informational purposes only. It should not be construed as legal advice. Always seek your institutions’ legal counsel if you have questions related to interpretation of regulations.

3. Agenda  Historical Overview  Types of Private Student Loans ◊ Fixed vs. Variable ◊ Repayment Options ◊ Examples of Benefits  Before applying for a Private Loan  The Private Student Loan Process  Summary & Questions

4. What are Private Student Loans? Private Student Loans help bridge the gap between the actual cost of education and the limited amount the government allows the student to borrow in its programs. Private loans are offered by private lenders. Eligibility for private student loans often depends on the applicant’s or cosigner’s credit score. ‘‘ ‘‘ *Definition from FinAid.com

5. Student debt in the news recently

6. Historical View of Private Loans 6

7. 10 Year Trend Analysis for Student Loans http://www.responsiblelending.org/state-of-lending/state-of-lending.html

8. In the Past Few Years, There Have Been Many Changes in the Private Student Loan Industry OLD NEW Underwriting Loans to (almost) anyone at (almost) any school with (almost) any cosigner. Student and cosigner both evaluated, and much more rigorously School type considered Credit score Primarily cosigner FICO Credit score of both student and cosigner used, and much higher values required Many other credit attributes reviewed Custom scorecards Collections Due diligence “check the box” style, modeled after federal program. Agencies compensated for carrying out tasks, not for performance Driven by data and analytics Custom treatment streams driven by credit risk Similar to other asset classes—credit cards Rigorous (micro) management of agencies and performance Student loan specific Not much customization of credit policy or collections Products custom designed with credit and portfolio management in mind Data, analytics, reporting and collections are custom designed to deal with student loan idiosyncrasies Private loan processing Limited disclosures required Application and Solicitation Disclosure Disclosure post approval of a loan Third and final disclosure when the loan is consummated “Self Certification” form A three-day recession or “right-to-cancel” period post providing the applicant with the final disclosure

9. Types of Private Education Loans

10. Types of Private Student Loans  Unlike in the past, now there are two types of Private Student Loans; those that have a variable interest rate and those that have a fixed interest rate. ◊ A fixed interest rate is an interest rate that does not change over the term of the loan. ◊ A variable interest rate is an interest rate which is tied to an index, such as the Wall Street Journal Prime, and fluctuates during the life of the line of credit.  Variable interest rates are the rate plus an index that is pulled at a specified rate (monthly, quarterly, etc. This is specified in the loan terms). Frequently used indices are:  LIBOR: LIBOR stands for The London Interbank Offered Rate. It is a daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale money market (or interbank market).  Prime Rate: The Prime Rate is the lowest rate of interest at which money may be borrowed commercially.

11. Repayment Options  Private Student Loans can offer a variety of repayment types: ◊ Immediate Repayment: Principal and interest payment begins approximately after the first disbursement, while the student is in school. ◊ Interest Only: Make interest-only payments while in school. Interest payments begin after the loan’s first disbursement. Principal payments are deferred until after graduation. ◊ Full Deferment: Defer all payments until after leaving school or ceasing to be enrolled ½ time. Payment of principal and interest begin after graduation. ◊ Partial Interest Repayment: Borrowers may pay partial interest while in school; defer principal and outstanding interest until after graduation.  Private Student Loans also offer a variety of repayment terms: ◊ Anywhere from 5, 10, 15, to 20 year repayment terms This list is not a comprehensive list of all repayment types. Availability of the repayment types and variables within them will vary per loan product, borrower and size of the loan.

12. Sample Benefits for Private Student Loans Many Private Student Loans are offering benefits beyond competitive rates in order to offer attractive loans to students. Examples of some benefits include: ◊ ACH reductions: Offer a certain rate reduction if the borrower signs up for automatic payments, and some lenders will offer an additional incentive if that automatic deduction comes from that bank (i.e. a SunTrust loan payment coming from a SunTrust checking account). ◊ Graduation reductions: Offer a rate reduction when the student had graduated. ◊ Cosigner Release: Allow a cosigner release after a certain number of on-time payments from the borrower. ◊ On-time payment rate reduction: Some lenders offer a rate reduction after a certain number of on-time payments are made. ◊ No fees: Most lenders will offer no origination fees on a loan. ◊ Principal Reductions: Offer a principal reduction for a certain number of on-time payments. ◊ Death Benefits: Offer student loan protection in case of student death.

13. Before Applying for a Loan 13

14. Cases for a Private Student Loan Who might need private loan funding? To fund the gap between cost of attendance less or minus any other federal aid, state, institutional programs and scholarships In lieu of or in concert with PLUS or Grad PLUS loan Non FAFSA filers, alternatives for families using HELOC, Credit Cards, 401K Specific student issues Less than half time SAP Past Due Balance Non Degree seeking programs International Students – US Co-signer may be required Out of state population

15. Before Applying for a Private Student Loan Student must have a good understanding of their economic circumstances so they can make an informed decision about what works best for their individual circumstance. Students may want to consider a co-signer, to increase the chances of credit approval and/or secure a better interest rate. Before applying for a private loan, students should file a FAFSA to exhaust their eligibility for federal aid (grants, Subsidized and Unsubsidized Stafford loans). Students should research their options: some lenders have different requirements that may or may not fit the student’s profile.

16. “Just Google it”  Students may Google private student loans, the result: Over four million hits in less then three seconds  Students have no guidance on what’s authentic and what’s not in their best interest

17. School Supported Private Lender List A school driven lender list provides students with a lender list compiled through a qualitative and/or quantitative process.

18. HEOA & TILA Changes for Private Lender Lists

19. Sources for Information on Aid and Credit  The federal government’s student aid web site, studentaid.ed.gov  FinAid.org  SmartBorrowing.com  AnnualCreditReport.com  MyFICO.com

20. The Private Loan Application Process

21. How are Private Student Loans Processed? The applicant applies to a lender for a loan. The lender reaches out to up to three credit bureaus to obtain your credit report. Fair Isaac created different formulas for each credit bureau that are slightly different. The credit bureaus use these to determine a credit score. The bureaus use the formulas and the applicant’s most recent credit activity to generate a credit report and your current score. The bureaus send that score (sometimes called a FICO score) and a credit report to the lender. The lender uses that information along with information that you provide to determine whether to approve the loan, and if so, what the terms of the loan will be. 1 6 The Lender Experian Experian FICO Algorithm Transunion FICO Algorithm Equifax Equifax FICO Algorithm Fair Isaac 5 2 4 3 1 2 3 4 5 6 The Applicant

22. Required Disclosures  Lenders are required to provide the applicant with disclosures during the application process. These include: ◊ Application and Solicitation Disclosure ◊ Self-Certification

23. Required Disclosures, continued  Approval Disclosure and Final Disclosure ◊ Approval Disclosure is generated when the student and/or cosigner accepts the loan.  Fields populated based on known data from the applicant ◊ The Final Disclosure is generated when the certification is received from the school  The fields are populated based on the actual date provided by the school  Loan amount  Disbursement date

24. Private Student Loan Process  There are steps to getting a PSL through to disbursement including steps the student is responsible for, the college is responsible for, and the lender is responsible for. Student LenderStudent Approval Disclosure accepted FAOLender Application approved, ASD reviewed Required documents collected Certification request sent to the financial aid office Lender 3 Day rescission period based on receipt of FD 1 st disbursement is made to school Loan certification is transmitted Certification received from School FD sent to student based on certification

25. Summary Private student loans have changed considerably over the past several years – from both the point of view of the borrower and of the school. The borrower has stronger, more competitive products to choose from while the school has had to adjust to the regulations required by the government to provide transparency to the applicant. Being able to provide students with the basics of applying and processing a student loan will lead to a smoother, expedited process and decrease in the number of calls related to private student loans.