Understanding Privately-insured Student Loans

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• Understanding Privately-insured Student Loans
• Michele Gralak
• MASFAP
• November 2006

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Payoff - The Value of Education

• Higher education results in higher earnings AND
  less unemployment

Sources Postsecondary Education
Opportunity, U.S. Census Bureau.
Represents average earnings for a full-time,
year-round worker over age 25.
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Payoff - The Value of Education

• Higher education results in higher work-life
  earnings

Sources U.S. Census Bureau, Current Population
Surveys 2000
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Sources of Funding for College Attendance
AY 2005/2006 - 222 Billion
Federal Student Loans
Parent/Student Contributions
Private Education Loans
Scholarships, Grants Other
Source Based on estimates by Octameron
Associates, Dont Miss Out, 29th Edition, by
College Board, 2004 Trends in Student Aid and
Sallie Mae. Includes tuition, room, board,
transportation and miscellaneous costs for two
and four year college degree granting programs.
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What is a privately-insured student loan?

• Its a loan made by a bank or some other
  organization so its very similar to a car loan
  or a personal loan.
• Its used to pay for college so generally you
  dont have to start repaying it until youre done
  with school.

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How is a private loan different from a federal
student loan?

• The Department of Education doesnt make the
  rules, federal and state laws do.
• Students need to pass a credit check instead of
  doing a FAFSA.
• Interest Rates and fees (if any) vary. They are
  based on credit history. Those with better
  credit histories will pay less.

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How is a private loan different from federal
student loans? (cont)

• Interest Rate is variable, so itll go up and
  down over the time you have the loan. There may
  not be a cap.
• Interest Rate is based on an Index plus a
  percentage. The Percentage is based on credit.
• LIBOR, T-bill and Prime .oh my

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How is a private loan different from federal
student loans? (cont)

• Annual loan limit is generally cost of attendance
  less other aid
• Aggregate loan limits.
• International students are eligible.
• Generally, private loans dont have as many
  repayment options as federal loans

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So what?

• 10,000 _at_ 8.25 no fees
• Interest accrued during school/grace 3,369
• MPA 130 for 15 years
• Total repaid 23,344
• 13,344 more than originally borrowed
• Assumes Loan is taken out freshman year of 4-year
  degree program, and 6 months of grace, with
  interest capping at repayment begin.

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More so what?

• 10,000 _at_ 14 no fees
• Interest accrued during school/grace 5,717
• MPA 209 for 15 years
• Total repaid 37,673
• 27,673 more than originally borrowed

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Whats the difference?

• MPA difference 79
• Total repaid About 14,329
• What could a student do with an extra 14,329?
• Probably wouldnt need a student loan!

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WOW! Lets save money!

• Use private loans as a last resort.
• Get a cosigner on the student loan.
  
• Develop good credit.
• Learn how to manage credit.
• Make payments while in school.

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FICO is not a rap-singer

• FICO score is another name for a credit score.
  Fair Isaac Corporation created it.
• Three Credit Reporting Agencies
  
• Equifax
• Experian
• TransUnion
• All use a credit scoring model very similar to
  FICO

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Whats a credit score?

• A grade of your credit behavior.
• Changes frequently, depending on how someone
  manages debt.
• Ranges from 300-850
• Higher scores are better.
• Its not a secret!

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Credit Score Factors
Types of Credit Used
Payment History
New Credit
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10
35
15
30
Length of Credit History
Amounts Owed
Source www.myfico.com
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Credit Score Factors

• Payment History 35
• Delinquent payments can have a major negative
  impact on scoring.
• Amount Owed 30
• Higher credit utilization will negatively impact
  credit score.
• Length of Credit History 15
• The longer the history, the higher the score.
• New Credit 10
• High number of inquiries in 12 month period.
• Type of Credit Used 10
• Higher percentage of secured credit is better.
• Source www.myfico.com

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Dont have any credit yet?

• Get a credit card with a LOW limit.
• Buy something that costs around 75 take two
  months to pay it back.
• Do it again.
• PAY ON TIME!
• Need about 12 months of activity to develop a
  credit history.

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Already have credit?

• PAY YOUR BILLS ON TIME!
• PAY YOUR BILLS ON TIME!
• PAY YOUR BILLS ON TIME!
• Keep charges and balances on your current credit
  card at less than 1/3 of the maximum amount.
• Ignore new credit card offers. The free gifs they
  give end up costing money. This includes
  department stores and other stores like the Gap
  or Abercrombie Fitch.

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Credit Repair

• If youve missed payments, get current
• Stay current
• Pay off debt instead of moving it around
• Contact your creditors if youre having trouble
  paying
• Dont wait til the last minute
• More tips available _at_ www.myfico.com/crediteducati
  on

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Whats your credit score?

• Get your credit report at one of these sites
• www.annualcreditreport.com
• 1-877 fact act (1-877-322-8228)
• www.myfico.com
• To get your credit score, itll cost

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If you dont manage your credit well, you may get
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• Questions?