Private Education Loan Fundamentals

Aubrey StellySenior Lender Consultant TG

Session objectives

• Provide the tools necessary to discuss the factors involved in evaluating private loans

• Enable you to provide a framework for borrowers to evaluate their private loan options

Factors for borrowers to consider

• Interest rates• Fees• Program types• Repayment terms

Interest rate factors

• Index– Prime Rate

– LIBOR

– Commercial Paper Rate

• Credit Score– Credit history

– Co-signer

• School

Index definitions

• Prime Interest Rate — Interest rate that commercial banks charge their most creditworthy borrowers, such as large corporations

• LIBOR (London Inter-bank Offered Rate) — Interest rate that banks charge each other for loans (usually in euros)

• Commercial Paper Rate — The rate paid by large corporations for short-term borrowings, usually less than the Prime Interest Rate

Interest rate example

Lender A Lender B

Loan Amount $5,000 $5,000

Repayment Term 10 Years 10 Years

Origination Fees None None

Co-signer Yes No

Rate Index LIBOR (0.23%) Prime Rate (3.25%)

Rate Margin +5.0% +7.75%

Starting Interest Rate 5.23% 11.0%

Monthly Payment $65.51 $101.07

Total Interest Paid $2,861 $7,128

Total Repayment Amount $7,861 $12,128

Fees

• Origination• Late• Ways to reduce

– ACH– Banking relationships

Fees example

Lender A Lender B

Loan Amount $5,000 $5,000

Repayment Term 10 Years 10 Years

Origination Fees None 3%

Co-signer Yes Yes

Rate Index LIBOR (0.23%) LIBOR (0.23%)

Rate Margin +5.0% +5.0%

Starting Interest Rate 5.23% 5.23%

No-fee Interest Rate 6.89% 7.40%

Monthly Payment $65.51 $67.54

Total Interest + Fees Paid Over Life of Loan

$2,861 $3,104

Program types

• State private loans• Private — General study• Private — Specialty study

Repayment details

• In-school• Post-completion• Capitalize interest or not

Interest capitalization example

Lender A Lender B

Loan Amount $5,000 $5,000

Repayment Term 10 Years 10 Years

Origination Fees None None

Co-signer Yes Yes

Rate Index 6.0% (fixed) LIBOR (0.23%)

Rate Margin N/A +5.77%

Starting Interest Rate 6.0% 6.0%

Capitalization Frequency Never Annually

Monthly Payment $55.51 $71.13

Total Interest Paid $2,936 $3,536

Total Repayment Amount $7,936 $8,536

Repayment length example

Lender A Lender B

Loan Amount $5,000 $5,000

Repayment Term 10 Years 5 Years

Origination Fees None None

Co-signer Yes Yes

Rate Index 6.0% (fixed) LIBOR (0.23%)

Rate Margin N/A +5.77%

Starting Interest Rate 6.0% 6.0%

Monthly Payment $69.67 $121.31

Total Interest Paid $3,360 $2,279

Total Repayment Amount $8,360 $7,279

Additional considerations

• Trade-offs• Penalties• Co-signer impact

Summary

• Interest rate is not always the most important factor.• Every borrower’s situation is different.• Borrowers should conduct their search over a short time

span so that the basis of the interest rates is similar.

Questions?

This presentation is available for download at

www.tgslc.org/tgconference.