Lenders have made it clear that students with poor credit are less likely to be able to find a private student loan. Fortunately, students have good federal options. But for students or parents with good credit who decide they want a private student loan, have rates increased? Some analysts guess yes, but it is a difficult question to analyze. Unless lenders release their pricing policies (which they don't), the only way to find out if rates have, indeed, gone up is to get old and new quotes for the same person with the same qualifications for the same type of loan.

We now have two such tests, me and a colleague. My colleague got quotes from seven lenders two years ago. This month she applied again to those same lenders. The results: four offered her a lower rate than two years ago, one offered a higher rate, one rejected her, and one had suspended operations. Combined with my results, this very small sample suggests that rates are unchanged or even down for people with good credit.

There’s another way to look at this, though: What was the lowest rate my colleague found two years ago compared to the lowest offer now? By that analysis, she would pay a rate one-tenth of a percentage point higher now than two years ago. (That’s because the one rate that had gone up was the one that was the lowest before). An increase, but a very small one.

Here are the details of my colleague’s loan offers. Two years ago (April 2006) My Rich Uncle offered her a rate of LIBOR plus 2.65 percentage points; now (March 2008) the rate is LIBOR plus 4.0, an increase of 1.35. In contrast, Access Group offered her the lowest rate this time around (LIBOR plus 2.75), a full 1.2 percentage points lower than that company’s offer two years ago. The rates from Bank of America, Sallie Mae, and Citibank had all dropped by one to two tenths of a percent. Education Finance Partners mysteriously denied her a loan this time, suggesting a co-borrower, while Loan to Learn has shut down its operations.

Posted by bob shireman at 6:30 PM | Permalink

Nearly a year ago, long before the current credit crunch, I spent some time reviewing the various methods of comparing prices on private student loans. I found that the "as low as" rates advertised on comparison sites don't tell the shopper very much. I also found that it is very difficult to get an actual rate quote for comparison purposes, because you have to complete entire applications, turn over personal details, and authorize credit checks. And those multiple credit checks from potential lenders can have the effect of hurting your credit score, because they create the impression that you are desperate to get a loan.

Nonetheless, I persevered and got some actual interest rate and fee quotes, and the promissory notes to go along with them.

With all the doomsday stories about the credit crunch, we decided it was time to see if we could confirm that even someone with good credit (still me, despite tempting fate with all those loan applications) would have a tougher time getting a loan or would face higher charges. So last week I went back to two of the lenders who had offered me loans last year, National
City and Suntrust. I plugged in the same loan amount, degree program, and other details.

Their responses seemed to take a day or two longer than last year, which may be a result of some of the layoffs in the industry. But both of them got back to me with rate quotes and promissory notes. The rate at National City was higher than last year, by the equivalent of about half of one percentage point (0.25 higher interest rate, 3.5% higher fee, 20-year term). But the rate at Suntrust was exactly the same as last year: the one-month LIBOR index plus 2.5 percentage points, with no fee.

Now I'll see if I've ruined my credit rating by applying for these loans. Then I'll be able to test whether someone with bad credit can get a private loan. (Fortunately, even if my credit has been destroyed, I can always get Federal Stafford Loans because they require no credit check).

Posted by bob shireman at 1:46 PM | Permalink

In our testimony to the Iowa legislature's Government Oversight Committee yesterday, we recommended that the state seek details on the rates charged to students by the Iowa Student Loan Liquidity Corporation, the nonprofit lender created by the state. Mark Kantrowitz, publisher of FinAid.org, agrees with us and suggests additional information that should be disclosed by lenders. He also dismisses nonprofits' claims that rate information should be kept secret:

"Ideally, I'd like to see lenders disclose the mappings from credit scores to their rate tiers and not just the tiers themselves. Add a FICO Score Range column to your table. The lenders insist that they cannot or will not do this voluntarily because it reveals competitive information. But it's really all about obscuring the mapping from borrower characteristics to rates. Yes, if lenders had to publish their tiering, there'd be more competition. But isn't that the point? If lender X knows that lender Y's cutoff for LIBOR + 2.0% is FICO 750, lender X can potentially undercut with LIBOR + 1.8% at FICO 760. By making the mapping opaque, they minimize the opportunity for competition. But, frankly, it also probably has a lot to do with making it harder for borrowers to shop around by forcing them to apply to obtain rate information. Lenders don't want clear information because student loans are a commodity, and if they let it behave like one, supply and demand will drive down prices."

"It's especially egregious when a state agency protests against releasing detailed pricing models for competitive reasons. What they're saying is that if they release the data, their competitors will be able to undercut them on price. Why is that a problem? Either it will force ISLLC to cut prices, or their borrowers will go elsewhere to get lower prices. Either way ISLLC's mission to enable students to pay for college is met. Of course, more likely ISLLC is not adequately aligning pricing with cost, profiting from some students to subsidize others, and so will be prone to price competition on them. But the real problem is you have agencies thinking about profits first and public benefit second."

Posted by bob shireman at 1:19 PM | Permalink

By Deborah Frankle, Research Analyst

Private or alternative loans comprise a growing share of student loans, despite being more costly than federal student loans. Students and parents are often unaware of the differences between private and federal loans, and many borrowers don’t know which they have until they enter repayment. Unfortunately, despite required informational sessions about federal loans, the majority of college financial aid offices are not doing much to educate students about private loans.

The National Association of Financial Aid Administrators (NASFAA) recently conducted a survey of how financial aid offices discuss alternative loans with their students, results of which can be found in their magazine, Student Aid Transcript. The survey results showed that 63% of financial aid offices do not address alternative loans at all during entrance and exit counseling, the information sessions required when federal loans are taken out and again when the student leaves school. And while 58% of financial aid offices do provide more information about financial planning and debt management than they are required to, only 25% offer in-depth counseling on alternative loans specifically.

Barnard College recently became part of this minority by requiring students or parents who apply for a private loan to talk with the financial aid office before Barnard will certify a students' enrollment (and access to the loan). The goal of these conversations was not to discourage people from taking out private loans, but just to be sure that they understood the differences, cost, and potential consequences involved.
Still, this simple policy change reduced alternative loan volume by 73% in one year. The college found that many who initially wanted an alternative loan were not aware of the associated risks and interest rates, and had not fully considered other viable options. Such a huge drop in private loan volume suggests that the students who were initially drawn to these loans might not have really needed them.

Preventing unnecessary and risky borrowing is good for students, and should be a goal of all financial aid counselors. If the drop in alternative loan volume experienced by Barnard College is anything near the potential alternative loan decreases possible at other colleges, the 73 of college financial aid offices that do not currently guide students through these decisions should consider doing so.

Posted by Edie Irons at 12:15 PM | Permalink

It is easy for consumers to forget just how expensive a few percentage points of interest really is. I made this point on Tuesday in my presentation at the annual conference of the National Association of Student Financial Aid Administrators. Assume you have $10,000 in loans and the interest is deferred for four years of study, and then the loan is paid in equal installments over ten years:

• For a subsidized Stafford loan (on which the government covers interest during deferment), the total interest you would pay during that 14-year period would be $3,810.


• For an "unsubsidized" Stafford loan, the 6.8% interest yields total interest payments of $7,967.


• If you have a private loan with an interest rate of 10%, you would pay $13,085 in interest on top of that $10,000 borrowed.


• At 12%, the cost increases by more than $4,000, to $17,091 of interest.


• At 14%, add another $4,000, to $21,469 of interest.


• At 18%, you pay a whopping $31,921 of interest on top of the initial $10,000 borrowed, more than four times the interest on an "unsubsidized" Stafford loan.

These numbers, and the differences between them, would of course be even larger if you extend repayment beyond the 10 years used in this example. In an uncertain economy, these examples tell you just how valuable that fixed 6.8% maximum interest rate is on federal student loans (and a maximum of 8.5% on parent loans), whether they carry the "subsidized" moniker or not.

Continue reading "What a difference the interest rate makes" »

Posted by bob shireman at 7:56 AM | Permalink

Robert Shireman, the founder and president of The Institute, is guest-blogging this week on Higher Ed Watch, a higher education news and policy initiative from the New America Foundation. Here's an excerpt from his first post:

For most unsecured loans, the debtor who runs into difficulty can file for Chapter 7 liquidation or Chapter 13 reorganization, so a judge can sort out the appropriate treatment of the various loans. But there is a short list of debts that the law subjects to a different standard, allowing for discharge in only the most extreme circumstances. Generally the items on this special list make intuitive sense; for example, it seems appropriate for it to be especially difficult for people to escape child support responsibilities, overdue taxes, and criminal fines.

Federal student loans don’t quite seem like they deserve to be on that same list, and until 1998 they were not. Instead, there was an intermediate approach: they had special treatment, but only for the first seven years in repayment. After that, they were treated like other debts. There is at least some justification for making federal loans hard to discharge: they are backed by taxpayer dollars, and they come with some borrower protections in cases of economic hardship, unemployment, death, and disability.

But private student loans? There is no good reason that they should be accorded any heightened status, much less the exalted category that competes with criminal fines, child support, taxes, and now federal student loans. How and why did they gain this status in the 2005 bankruptcy bill?

Posted by Edie Irons at 2:33 PM | Permalink

Public confidence in college financial aid offices has been shattered by revelations of gifts, trips, deals, and kickbacks from lenders. In the resulting confusion, I have been asked time and again: "Is there a web site you can recommend where students can get accurate, complete and unbiased comparisons of student loan rates?"

Unfortunately, the answer is no.

The sites we have seen take money from lenders in exchange for getting listed. Often, lenders pay a premium to get prominent placement in the user’s search results. In some cases, "comparison" sites actually lead to only one or two lenders out of the thousands in the market. Even on sites that feature multiple lenders, it is perilously easy to be led down the wrong road, ending up with higher-cost loans that do not carry the interest caps and other protections that come with federal loans.

I recently logged into SimpleTuition.com to see what loan offers I could get if I decided to pursue my MBA at U.C. Berkeley. The lowest rate on the list (showing up on page 2) was 7.27% for a private loan from a company called Student Funding Group LLC. The price-conscious and time-constrained consumer, having found the best deal, might click on the "apply now" button and end the comparison shopping. Instead, I opened the expanded version of the search results, which revealed that the 7.27% is the "as low as" rate. It’s not a sure thing until I submit a complete application and allow the lender to peruse my credit reports.

Still, I had reason to be optimistic. MyFICO.com said my credit is so good that "Most lenders will consider offering you their most attractive and most competitive rates" and may even offer me "special incentives and rewards targeted to their 'best' customers." I should be a slam-dunk for that as-low-as rate of 7.27%, I thought. I proceeded through the application process (no, it didn’t take only a minute, as advertised) and eventually got a rate quote: 8.75% plus 4% in fees, or the equivalent of between 9 to 10% -- much more than the 7.27% that at first appeared possible.

Many (maybe most) consumers, after filling out that whole application, would go ahead and take the loan even at the higher rate, assuming there was some good reason they can’t get the as-low-as rate. But I decided to compare. A second lender, Sun Trust, had showed up on SimpleTuition with an as-low-as rate of 7.28%. After submitting, again, a whole application, I received a rate quote of 7.875%. It was much closer to the as-low-as rate, though there was no indication as to whether there would be any fees charged. I inquired via email, and it appeared that there would be no fees applied in my case.

Had I found the best loan for me? No, not even close. It turns out that SimpleTuition neglected to tell me about Federal Stafford loans, with rates of no more than 6.8%. And while the list included Federal Grad-Plus loans, I ignored them because the interest rate of 7.92% was higher than the rates I saw on listed private loans. Or so I thought. The important detail that I missed—because it’s not clear on the web site—was that the Grad-Plus loan rates are fixed, not variable like the private loans. That's a critical and potentially expensive distinction.

Not all lenders try to push private loans ahead of Federal loans. For example, Wachovia strongly encourages students to get Federal loans before considering private loans. Contrast that with the treatment you get when seeking a student loan through LendingTree.com. The site directs you immediately to a private loan company. And if you express an interest in Federal loans instead of their more expensive private loan, you are told with an ominous lack of enthusiasm: "Federal Loans may be a good option for some families." In fact, Federal loans are the best place to start for nearly everyone.

But wait! The lender list at GreentreeGazette.com shows that National City has private loans with zero interest. I applied. The promissory note arrived and I prepared to provide my electronic signature and get my loan. But I noticed that it said that my interest rate "margin" would be 4.25. I perused the rest of the document and found that the interest rate would be LIBOR plus the margin, which totals almost 10%. Plus 4% in fees. Another bad lead.

The system is confusing enough without the added problem of colleges' advice being potentially tainted by conflicts of interest. Students in the lending maze need unbiased, knowledgeable advisors. That's the important role that college financial aid administrators should be playing in the process.

Posted by bob shireman at 8:32 AM | Permalink

Companies offering private student loans advertise low rates, but the rates they actually charge to individual borrowers, and how they determine those rates, are closely-held trade secrets. The rates are based on borrower credit scores and other factors; ultimately, companies maximize their returns by trying to charge the highest rate they can while still getting the business.

One way to determine the actual rates being charged on private student loans is to review the prospectuses that accompany portfolios of loans that are sold to investors. We looked at four recent portfolios from Sallie Mae, and one Fitch Ratings review of a portfolio from the National Collegiate Student Loan Trust. These portfolios revealed average interest rates today of 9.77%, 9.91%, 10.0%, 10.11% and 10.35% (based on a today's Prime rate of 8.25% and a 3-month LIBOR rate of 5.47%). Many borrowers, at least 15% of them according to the investor reports, are charged interest rates of more than 12%. These rates are variable, so as interest rates in the economy increase, so do the rates paid by the borrowers.

Posted by bob shireman at 1:09 PM | Permalink

The economicdiversity.org database includes campus-by-campus data on the total student loan debt of graduating seniors. The numbers come from the Common Data Set, and are reported by the campuses to the various publishers of college guides. The instructions to campuses tell them to include private loans in the total. But at a recent meeting between campus data-keepers and the publishers, it became clear that some campuses have a better handle than others on the amount of private loans being made to their students.

To be clearer about the totals in future data collections, the Common Data Set will, in the future, ask campuses to provide separate totals for federal and private loans; some campuses will input a "not available" in the private loan field.

One solution to this data problem would be for the feds to require that private loans be certified by the college in order to qualify for the tax deduction on student loan interest. That way, financial aid administrators would be able to track who has private loans, and how much students have truly borrowed. They would also be able to check to make sure that the student isn't making a mistake by signing up for a high-rate or otherwise undesirable loan. This might also help borrowers down the line, since many don't know the differences between federal and private loans, and are unclear as to which they have. If aid administrators had more information, they could more easily advise students about the risks and tradeoffs of alternative loans.

Posted by bob shireman at 3:13 PM | Permalink

Three disturbing stories about the rise of private student loans:

When a borrower defaults on a federal loan, it affects the school's overall default rate, which the federal government uses as an indicator of school quality. Willis Hulings, CEO of TERI, a nonprofit guarantor of private loans, told an industry conference recently that some schools are turning to private loans in order to dodge the federal default triggers. The way I heard it from another source, some schools with borderline high default rates in the federal loan program steer particular students -- those they fear will default -- to private loans so that a default won't show up in the federal numbers. If, in fact, the student is a default risk, then it is likely that the lender is charging a very high interest rate (unless the borrower has a creditworthy cosigner).

I would bet this second situation is more common: private loans being used for students who don't qualify for federal loans because they are not making "satisfactory academic progress." A student task force at the University of Nevada, Reno, reported that as true there. Schools decide what is "satisfactory," and in UNR's case it's a 2.0 GPA. So, essentially, students who are at a high risk of flunking out and not ultimately earning the salaries that will allow them to pay off student loans are getting high-rate private loans. Yikes. I hope their parents are the cosigners.

A third story from a reliable source. Private colleges encourage low-income students to enroll. Instead of putting together a full financial aid package, college officials suggest they go ahead and attend, paying tuition on an installment plan, which is commonly offered at many colleges. The students complete the coursework, but cannot pay the tuition, and ultimately determine that they cannot afford to continue at the college. So they decide to transfer to a lower-tution option. But they can't transfer, because the college won't release the transcripts until they've paid the tuition. They're stuck.

To some degree, these types of problems can be reduced through vigilant oversight by regulators and the media. One good example is the private loan scandal at Lehigh Valley College in Pennsylvania last year.

Posted by bob shireman at 3:08 PM | Permalink

Private student loans are not just an asterisk in the loan data anymore. And they're not just for law and med students, either. According to our Project on Student Debt, the numbers in 2003-4 stood at:
--5% of students in public four-year colleges took out private loans (compared to 43% federal);
--11% of students in private four-year colleges (compared to 54% federal); and,
--15% of students at for-profit colleges had private loans (compared to 80% federal).

Are those numbers going to continue to rise? At an industry conference a few days ago, more than one expert predicted that private student loans could overtake federally-backed loans in six or seven years' time.

Getting accurate, up-to-date data on private loans is tricky. Those 2003-4 figures are from a survey conducted by the National Center for Education Statistics -- but the surveys are conducted only every few years. What has happened with private loans in 2005 and 2006? For 2005, the College Board estimated, based on a survey of loan companies, a one-year increase of 30 percent in private loans.

Colleges continue to report (and sometimes facilitate) the growth in private loans. According to a student task force report posted on Student Debt Alert, UMass Boston had a 56% increase in the number of private loans between 2003-4 and 2004-5 (from 368 to 576). At the lender conference I attended, the financial aid director from Michigan State University reported an increase in private loans from $12.7 million in 2004, to $20.6 million in 2006, a 63% increase.

Schools do not necessarily know whether their students have taken out alternative student loans. Some loans are made through the financial aid office. But a number of lenders are direct-to-consumer ("DTC" in the lender world). They require some proof of enrollment, but in some cases that can be a copy of paid tuition bill, or just an electronic data match with the National Student Clearinghouse. In those cases, the loans won't show up in schools' tallies of loans to their students.

Posted by bob shireman at 8:49 PM | Permalink