PRIVATE LOANS TOPICS

TOPICS INTRODUCTION DON'T DO IT THE REAL QUESTION IS: WHY WOULD ANYONE    WANT A PRIVATE COLLEGE LOAN ANYWAY? LINKS WHOM CAN YOU TRUST? ADVICE BORROWING FROM BANKERS CONSOLIDATING AND REPAYING LOANS WARNINGS

PRIVATE LOANS INTRODUCTION

PRIVATE EDUCATION LOANS, also called private student loans or alternative loans, are non-government loans which can be used for any education-related purpose, including books, tuition, room, board, lab fees, and transportation albeit minus the financial aid that you receive for the relevant time period. These loans are unregulated credit-score based consumer loans that leave you dealing with bankers without government protection.      Last year private lenders issued $79 billion in loans. Some of that traffic was tainted by underhanded tactics such as paying colleges for steering business. The previous sentence is from Forbes (February 11, 2008) page 34.      Private loans require no collateral but loan fees on these loans can range from 0% to as high as 11% while the loan itself may carry double-digit interest rates as high as 20%.       Before resorting to private loans (for many, the loans of last resort), explore, or have your parents or relatives explore, all other options including grants (federal and state), scholarships (private, federal, state, and college), loans (federal, state, college, family, and friends). Also consider collateral based loans that may offer better terms (e.g. a first mortgage, second mortgage, home equity line of credit (HELOC), or life insurance).        Parents borrowing from their 401(k) is "tempting but oh so wrong. Raid your 401(k) and you lose out on years of tax-deferred growth youll need to pay for retirement. Moreover, if you leave your job or are laid off, the full loan amount must typically be repaid within a few months." This last paragraph is from BEAT THE COLLEGE LOAN CRUNCH.      If you so decide to take out a private loan, hopefully, your college's financial aid office will know where the best deals are but always do some shopping on your own.

CO-SIGNER. Having a co-signer may lower the fees and interest rate of a private loan but the assets of the cosigner will be at risk if the borrower falls behind in her/his payments.

SOME DIFFERENCES BETWEEN FEDERAL AND PRIVATE LOANS. Federal loans are borrowed from the government, while private loans are borrowed from lenders such as banks. In general, private loans are credit-based, which means that your eligibility is determined by your credit rating. Private lenders may require cosigners and may also require proof of income from the student or a cosigner before the student is approved for a loan. Additionally, federal loans generally have lower interest rates than private loans. From EdFund's webpage FINANCING YOUR EDUCATION FAQ.     The Maryland Higher Education Commissions adds some more differences: "The interest rate for private student loans is based on the credit rating of the student or co-signer and the amount of the loan, so the interest rate may be higher if the borrower's credit rating is poor or the loan amount is low."Private student loans usually cannot be consolidated (combined for easier repayment) with other loans." "Tax deduction benefits may not be available on private studentg loans." "Options to postpone or lower  payments may be limited and subject to additional fees."

PRIVATE LOANS DON'T DO IT!

Ideally you are here by mistake and have no interest (no pun intended) in a private loan but if you are considering a private loan, begin by reading BEAT THE COLLEGE LOAN CRUNCH.       The State of Maryland Higher Education Commission states, "Explore private loans only after you have applied for all other sources of financial assistance." SOURCE      The Kentucky Higher Education Assistance Authority states that, "Private loans should be your last resort when it comes to paying for college." SOURCE       Our opinion is, "If you have not begun college yet, exclude thoughts of your attending a college or university that will require your taking out a private loan."

OUR OPINION. This website does not believe that private education loans are the loans of last resort; we believe that these loans are the loans of no resort. That is, if you have to ask about a private loan, you cnnot afford the college. But isn't attending an elite private university (e.g. Princeton, Harvard, Yale) or an elite private college worth borrowing to the maximum for. The answer here may well be "Yes" but most of these elite universities and colleges offer generous financial aid programs.       If Princeton, Harvard, or Yale is not accepting you even though you have excellent grades and excellent test scores, attending one of the flagship universities of your state (e.g. in California, the University of California system, perhaps excluding UC Merced and UC Riverside, in Florida, the University of Florida, etc) is a good career move. If you have good grades and good SAT or ACT scores, attending a second-tier state college or university may be a good career move.      If you have a so-so high school record and modest SAT or ACT scores, attending a private college for rich people who cannot get into a state university is probably not a good investment.

PRIVATE LOANS THE REAL QUESTION IS: WHY WOULD ANYONE WANT A PRIVATE COLLEGE LOAN ANYWAY?

We strongely recommend your reading BEAT THE COLLEGE LOAN CRUNCH, which is a very informative and well-written article. I very strongly recommend this article to students and parents in the market for a private loan. Below we plagarize a small portion of this article.      Private lenders are leaving the college [lending] market too - 27 so far [June 12, 2008]. Those who remain are making it tougher to qualify for loans, while jacking up rates and reducing discounts.       Stick with Uncle Sam. It may seem as if there are hundreds of different types of college loans out there. But the options basically boil down to this: You can borrow from the government or a private lender, in your name or your child's. That's it.      Despite the scary stuff in the news lately about how scarce college money will be, loans from the federal government, for both students and parents, will remain plentiful. Private loans, however, are another matter. The real question is, Why would anyone want a private college loan anyway?       True, more and more families have been opting for them - they now account for 20% of all student loans vs. just 4% a decade ago. But their popularity is mostly because of aggressive marketing and what seems like an easier application process (you don't have to fill out the cumbersome Free Application for Federal Student Aid, a/k/a FAFSA, to get one) - not because they're a better deal.      Rates on most private college loans are higher than those on government loans (in some cases, twice as high), and they're variable, so your rate may rise in the future. Fees are usually more onerous too (up to 11% of the amount borrowed vs. 2% to 4% for federal loans).      And now it's tougher to qualify for them: Most private lenders these days require students to have a cosigner (hello, Mom and Dad) with a credit score of at least 680 vs. 640 previously. And you'll need 750 or better to land the lowest rates.      The bottom line for most families: Consider a private loan only as a last resort and instead make federal Staffords (for students) and PLUS loans (for parents) your borrowing vehicles of choice.

 

PRIVATE LOANS LINKS

The New York State Higher Education Services Corporation (HESC) gives advise about SMART BORROWING. This is an excellent webpage that begins with the very good advice: Know your college costs. They can include tuition, room and board, transportation, books, supplies and fees. Make sure you understand your cost of attendance before you borrow money to pay for it.

Chase indicates WHAT ARE SOME OF THE DIFFERENCES BETWEEN FEDERAL AND PRIVATE LOANS (scroll down past their self promotion). Sallie Mae makes private loans and here they offer help in COMPARING PRIVATE LOANS; also Sallie Mae suggests other possible loan sources: home equity loans, lines of credit, life insurance, and retirement plans. Education Finance Partners has ABOUT PRIVATE LOANS (note that some of their answers are for their private loans, not for private loans in general.

PRIVATE LOANS WHOM CAN YOU TRUST?

This website takes in no income and provides unbiased advice; we hope, but cannot guarantee, that the advice in this website has merit. As indicated below not all websites are unbiased. Take care.

The U.S. Senate Health Committee issued a report in June [2007] concluding that illegal student loan marketing activities are "systemic and cannot be isolated to a few 'problem' lenders or schools." The preceding quote, as well as much of the material in this subsection, is from HOW TO IMPROVE STUDENT LOAN DISCLOSURES AND COUNSELING from  Consumers Union.org, the nonprofit publisher of Consumers Reports

In TO LOOK TWICE AT LOAN ADVICE, U. S. News & World Report admonishes the reader that online information might not be as unbiased as it appears. In this same article, Luke Swarthout, higher education advocate for the U.S. Public Interest Research Group notes that "There's a pervasive and problematic conflict of interest when student lenders try to market themselves as impartial arbiters of information to college students."

Unfortunately, seeking private loans may put you in contact with some people who, in a just society, would be forced to spend some of their time in the big house. Unfortunatly, since the days of our great communicator (Ronald Reagan), the tendency has been to make capitalist criminals look like honest business people.

Colleges currently calculate the cost of attending school in different ways, so comparisons are difficult. College financial aid award letters don't always make clear the difference between grants, which don't need to be repaid, and loans, which do. Colleges often miss opportunities to help families minimize loans, secure low-cost financing, or figure out the bottom-line cost of loans.  a Private-loan lenders exacerbate these problems by failing to adequately disclose important terms and rates that families need to compare loan options. For example, lenders aren't required to tell students about how high payments on variable interest rate loans can balloon if their interest rate rises. And students and parents often don't get required disclosures until right before they sign for the loan.

WHOM CAN YOU TRUST? Private student loans have become big and increasingly competitive business; with rising tuition and lagging government aid, students took out nearly $13.8 billion in private loans in 2004-5, more than 10 times the amount borrowed a decade before. For bankers, the key to this business is university financial aid offices, which compile lists of 'preferred' lenders;" students rarely comparison shop and rely on those lists; financial-aid administrators claim they pick lenders with the most competitive terms, but some question whether students are getting the best deals; note that incentives and gifts offered to college and university officials by private loan companies pose possible conflict of interest; it is hard to determine how widespread incentives are, because neither universities nor lenders disclose arrangements; a law making it illegal for lenders to use inducements to get applicants for federally backed students loans does not apply to private loans. This information is primarily from the New York Times (Tuesday, October 24, 2006).

WEBMASTER'S OPINION. Where can one find a banker? Answer: At your feet or at your throat. At least in the short run, bankers are at the government's feet and at the borrower's throat.

PRIVATE LOANS ADVICE

AVOID PRIVATE STUDENT LOANS. Experts agree that [private] loans should be a last resort because they carry high variable rates and fees.       If you decide on a private loan, be aware that you won't always get the lenders lowest advertised rate--often you learn your rate only after you submit an application. And comparison shopping is costly: Every application can knock up to five points off your credit score.                 This information is primarily from the FORTUNE (April 14, 2008) page 36. DO NOT USE CREDIT CARDS TO FINANCE COLLEGE.   MAKE GOOD USE OF FEDERAL SCHOLARSHSIPS AND LOANS and STATE SCHOLARSHIPS AND LOANS. Federal and state loans are almost always kinder and gentler than private loans. Check to see what is required for a state loan in your home state and in the states in which you may attend college. Unfortunately many state loan programs are being cut back. EXHAUST LOW-COST FEDERAL AND STATE LOANS BEFORE EVEN CONSIDERING PRIVATE LOANS. Nearly 50 percent of undergraduate private educational loan borrowers fail to exhaust their low-cost federal government loans before turning to more expensive private loans to pay for college. Consumers Union recommends that parents and students tap federal loans first, since nearly everyone qualifies [and the interest rate is relatively low]. Families should limit taking out private educational loans since they cost more and have less flexible repayment plans than federal loans.     BORROW WISELY. Judge Richard Poland, Flagler College, advises that "Regardless of how much money is available, borrow wisely. A day for payback is just around the corner. Grant and scholarship money is always preferred over a loan.  Low interest rates are better than high interest rates. Everyone knows this, but be willing to do your homework so you do not have to repay more than is necessary. You should borrow as little as possible, especially if you already have college loans to pay off."  THE SKY'S THE LIMIT. SunTrust brings the good news that you can "Borrow up to $100,000 for undergraduate study, and $150,000 for graduate.study ... ."

PRIVATE LOANS BORROWING FROM BANKERS

The ANNUAL PERCENTAGE RATE (APR) is expressed as a percentage rate and is a way to measure all the costs associated with a loan. The APR reflects the total yearly cost of a loan and gives gives a common starting point to compare various lenders. The APR is very relevant for a fixed-rate loan (Stafford and PLUS loans for example). The APR is determined by calculating the average compound interest over the term of the loan taking into account the interest rate, fees, loan payment incentives, capitalized interest, length of repayment, timing of the payments, and discounts, if any.      The APR calculation was introduced under the Consumer Credit Act. The intention was to prevent lenders from quoting low interest rates while actually charging excessive fees therefore driving the actual cost of borrowing up. Unfortunately, this protection is not always available but always ask for the APR realizing that is some cases this request can legally be denied.

CRITERIA FOR CHOOSING A PRIVATE LENDER This is relevant since federal law gives you the right to get your college loan from any lender. First Step. Obtain a list of recommended lenders. Sources for this list are: The financial-aid office at your college (or future college) probably has a list of recommended lenders. Some states use STATE FINANCIAL AID to provide loans to residents of the state and to student attending college in that state. The website COLLEGELENDERLIST provides a lenders list for some junior colleges, colleges, and universities. A list of lenders for a school may be of interest even if you do not intend to attend that school.   You may want to check our list of lenders below. Our list is for information only. I am  not recommending any lender. The banks that your parents use. The credit unions to which you or your parents are, or can be, members .   Second Step. Shorten your list using information (e.g. interest rate, APR, amount of loan fees, prepayment penalties, etc.) gathered from the lender institutions either by using their website or by calling them.  Third Step. Decide the choice of lender using the information gathered, input from your parents, and advice from the financial aid office at your college.

Read the right side of MYTH BUSTERS; the myths are related to payment incentives offered by private lenders.

VARIABLE INTEREST RATES seem to be de rigueur for private loans with the interest rate usually depending on LIBOR or the prime rate.  DEFINITIONS OF LIBOR AND PRIME RATE. LIBOR (London Interbank Offered Rate) is the rate at which banks borrow funds from other banks in the London interbank market. It is also the most widely used benchmark or reference rate for short term interest rates on variable (adjustable) rate credit accounts/loans.      The prime rate is the interest rate charged by banks for short-term loans to their most creditworthy customers. Only a small percentage of customers qualify for the prime rate, which tends to be the lowest going interest rate and thus serves as a basis for other, higher risk loans. The prime rate is not very a volatile index however it generally rises quickly but declines very slowly."       The WSJ PRIME RATE, as reported by the Wall Street Journal's bank survey, is among the most widely used benchmark in setting home equity lines of credit and credit card rates. It is in turn based on the fed funds rate, which is set by the Federal Reserve. The prime rate, as reported by the Wall Street Journal's bank survey, is among the most widely used benchmark in setting home equity lines of credit and credit card rates. It is in turn based on the fed funds rate, which is set by the Federal Reserve.     The variable interest rate on a a private loan may, for example, be  LIBOR + 2.75%  or may be  Prime + 0.50.       Recent LIBOR and recent WSJ PRIME RATE have been:            LIBOR (3 month): 0.91% May 13, 2009           LIBOR (6 month): 1.43% May 13, 2009           WSJ Prime Rate:  3.25% May 13, 2009 Compare with:           LIBOR (3 month): 4.87% Mid-November 2007           LIBOR (6 month): 4.74% Mid-November 2007           WSJ Prime Rate:   5.00% May 13, 2008 Education Finance Partners says that "LIBOR is the standard financial index used in the U.S. capital markets. The majority of private loan providers use LIBOR or the Prime Rate to set interest rates. LIBOR variability has been smaller than the Prime Rate, which has tended to experience larger, sporadic changes." LIBOR VS. PRIME RATE. Money Magazine (JUNE, 2007, PAGE 25) says that           If you must resort to a private loan, look for one indexed to Libor,           not the prime rate. About half of private student loans are indexed to Libor.

HAVING A PARENT COSIGN FOR A PRIVATE LOAN. The upside of the parent's cosigning for a private loan may be lower fees or a lower interest rate on the loan (if there are two borrowers on a loan, lenders will base their rate on the higher credit score); the downside of the parent's cosigning for a private loan is that the parent's assets will be at risk if the borrower falls behind in her/his payments.

LOAN PAYMENT INCENTIVES. Some lenders may offer loan-repayment-incentives to get your business; for example, if you make the first 48 payments on time, the annual interest rate for the remainder of your loan will be reduced from 8.5 to 6.5. Almost always, all hope of receiving a loan-repayment-incentive ends with the first late payment (and often, it is the first payment that is late). Mosts borrowers do not collect on these incentives.       Total Higher Education (T.H.E.) is exceptionally generous saying that the repayment incentives cease only when the borrower is 60 or more days late. Also T.H.E. is exceptionally generous in allowing the loan incentives to resume when the borrower brings the "account to less than 60 days late."

For a lists of lenders more complete than the one we give below, see NATIONAL AND REGIONAL EDUCATION LENDERS and see a list of the LARGEST EDUCATION LENDERS in order; the top five, in order, are Sallie Mae, Citibank, Bank One, Bank of America, and Wells Fargo. Interestingly enough, two universities are in the top fifty: Nova Southeastern (25th) and the University of Phoenix (38th). Do their financial aid offices face a conflict of interest?

OUR LIST OF LENDERS. Below we have a list of lenders. I am not recommending them but all or almost all of these lenders are on the recommended list of at least one state university. CitiBank seems to be on most of the school lists that I checked.

OTHER LENDERS. Check out STATE-SPONSORED LENDERS. Also make sure to check out the banks, savings and loans, and credit unions where your parents bank.

Prelaw Handbook has a table like the one below but with LAW SCHOOL FINANCIAL AID INFORMATION.

The federal government has come up with a rescue plan (more accurately, a welfare program) for needy bankers; as a consequence (unintended ??), some students will also benefit. The Chronicle of Higher Education (page A4, June 6, 2008 issue) notes that, "The stock of Sallie Mae, the nation's largest student loan company, after losing more than two-thirds of its value last year, shot up 28 percent over the three days while the resue plan was polished and publisized. 'Our news is good,' Sallie Mae's chief executive Albert L. Lord, said in describing the administration's terms to college aid officials last month. 'I believe it's very good.'" Certainly Mr. Lord has reason to gloat. As usual, bankers are at our feet (as they were in going after federal money) or at our throat (this will happen when you apply for a private loan or fall behind in your private-loan payments).

FINANCIAL INCENTIVES. Lenders offer monetary rewards for doing business with them and for making on-time payments. The most common incentive offered is an interest rate reduction for payment of your loan(s) through automatic debit from your checking or savings account. Check lender websites for information on incentives offered and qualifying details.

THE FOLLOWING LIST OF LENDERS IS OUT-OF-DATE BECAUSE MANY LENDERS HAVE CUT BACK ON STUDENT LOANS. A QUICK PHONE CALL OR INTERNET INQUIRY SHOULD GET YOU UP-TO-DATE. THE LOAN SITUATION SHOULD SOON STABILIZE.

LENDER    PHONE      NUMBER     INFORMATION ABOUT FFEL LOANS AND PRIVATE LOANS                                 Bank of  America   800-344-8382   Bank of America offers STAFFORD LOANS, PLUS LOANS FOR PARENTS, PLUS LOANS FOR GRADUATE AND PROFESSIONAL STUDENTS, and PRIVATE LOANS (STANDARD and TERI). As just indicated, Bank of America has two private loans. There is not much difference twixt the two.    Chase   800-487-4404      citibank       800-967-2400    Citibank offers STAFFORD LOANS, PLUS LOANS FOR PARENTS, PLUS LOANS FOR GRADUATE AND PROFESSIONAL STUDENTS, and PRIVATE LOANS.  Collegiate  Funding  Service   866-922-9965   Find out (a little) about CFS. Collegiate Funding Service offers UNDERGRADUATE STAFFORD LOANS, GRADUATE STAFFORD LOANS, PLUS LOANS FOR PARENTS, PLUS LOANS FOR GRADUATE AND PROFESSIONAL STUDENTS, PRIVATE UNDERGRADUATE LOANS and PRIVATE GRADUATE AND PROFESSIONAL STUDENT LOANS. Discover Student Loans   877-728-3030   Discover Student Loans offers  STAFFORD LOANS FOR UNDERGRADUATE STUDENTS, STAFFORD LOANS FOR GRADUATE STUDENTS, PLUS LOANS FOR PARENTS, PLUS LOANS FOR GRADUATE AND PROFESSIONAL STUDENTS, and PRIVATE EDUCATION LOANS.  Key Bank   800-539-2968    Key Bank offers STAFFORD LOANS, PLUS LOANS FOR PARENTS, PRIVATE PARENT LOAN, PRIVATE UNDERGRADUATE LOANS, PLUS LOANS FOR GRADUATE AND PROFESSIONAL STUDENTS, and PRIVATE LOANS FOR GRADUATE STUDENTS,  Nellie Mae   800-367-8848   Nellie Mae became a wholly owned subsidiary of SLM Corporation (Sallie Mae) in 1999.  STAFFORD LOANS, PLUS LOANS FOR PARENTS, PLUS LOANS FOR GRADUATE AND PROFESSIONAL STUDENTS, and PRIVATE LOANS.  Salli Mae   800-272-4665   Salli Mae offers STAFFORD LOANS, PLUS LOANS FOR PARENTS, PLUS LOANS FOR GRADUATE AND PROFESSIONAL STUDENTS, and PRIVATE LOANS.  Total  Higher  Education  (T.H.E.)   800-366-0604   "As a non-profit organization, T.H.E.'s mission is to lower the cost of education to students. Rather than paying stockholders huge profits, we return our profits to you as borrower benefits." Features of the T.H.E. Undergrad/Graduate Loan Program include ZERO FEES on Stafford loans and private loans. See REPAYMENT BONUS. You may want to read QUESTIONS TO ASK WHEN EVALUATING A LENDER.      Total Higher Education offers STAFFORD LOANS, PLUS LOANS FOR PARENTS, PLUS LOANS FOR GRADUATE AND PROFESSIONAL STUDENTS, and PRIVATE LOANS.           Wachovia    800-338-2243   Wachovia offers STAFFORD LOANS, PLUS LOANS FOR PARENTS, PLUS LOANS FOR GRADUATE AND PROFESSIONAL STUDENTS, and PRIVATE LOANS (WACHOVIA EDUCATION LOAN).  Wells Fargo   800-658-3567   Wells Fargo offers STAFFORD LOANS, PLUS LOANS FOR PARENTS, PLUS LOANS FOR GRADUATE AND PROFESSIONAL STUDENTS, and PRIVATE LOANS (Wells Fargo CollegiateŽ Loan).           Access Group   800-282-1550   Access Group claims to be "The nonprofit graduate loan specialist; Access Group does not make loans to undergraduates.

Some lenders have websites (and special deals) for student at certain universities.

PRIVATE LOANS CONSOLIDATING AND REPAYING LOANS

Loan consolidation CONSOLIDATION is the process of combining one or more eligible educational loans into a single new loan.  The Pennsylvania State University offers LOAN CONSOLIDATION BASICS.   If you do take out loans, make sure to BORROW RESPONSIBLY.  From , a U.S. Department of Education website, Obtain information about REPAYING FEDERAL STUDENT LOANS. Loan consolidation is the process of combining one or more eligible educational loans into a single new loan. The website loanconsolidation.ed.gov explains consolidation. LOAN CONSOLIDATION for all your student loans payments is a possibility. Check out LOAN CONSOLIDATION.

PRIVATE LOANS WARNINGS

Only after exhausting all federal and state loans should you even consider private loans. As with home loans, for private loans for college, be wary of low-interest teaser rates.  Discounts that take effect at the beginning of the loan (e.g. an automatice drop in the interest rate or a waiving of the origination fee) and have no restrictions can be of great value. Discounts with restrictions (e.g. an interest rate reduction for twenty-four consecutive on-time payments) are oftentimes not collected even by borrowers with the best intentions. These discounts with restrictions should have little effect on choice of loan.