Student Loan Blog : Student Lending Analytics

Private Student Loans: Proceed With Caution

Student Loan Girl — Mon, 04 May 2009 21:07:00 GMT

Although the government has taken steps to bolster the federal student loan program by expanding Pell Grant awards and raising the maximum award amount of federal Stafford student loans, federal financial aid will still not be enough for many families to pay for college this year.

Grappling with stock market losses that have negatively affected 529 college savings plans and with declining home values that have essentially made home equity loans nonexistent, families of college students will likely have to rely more on private student loans, in addition to federal aid, this year to help pay for their education expenses, reports The New York Times (“Students’ First Lesson: Beware Loans’ Fine Print", May 2, 2009).

But the Times warns that private student loan borrowers need to be particularly cautious when applying for loans.

Private student loan lenders can set their own loan terms and aren’t required to inform their borrowers of the loans rates, fees, and terms. Citing data compiled by Student Lending Analytics, a company that helps schools analyze lending programs, the Times advises families applying for private student loans to weigh their options carefully and to take a close look at the fine print.

Interest Rates Vary From Lender to Lender

Unlike federal student loans, which have fixed interest rates, private student loans carry an average interest rate of 11 percent, according to Student Lending Analytics. However, lenders charge interest rates higher than 11 percent and, in some cases, won’t disclose the interest rate a borrower will be charged until after a borrower signs a promissory note.

Banks offer fixed-rate loans ranging from 7 percent to 12 percent, with big banks charging the highest rates. But at times, banks — particularly JPMorgan Chase, PNC Financial, and SunTrust Bank — hike up the rates on these loans by two to three percentage points if a borrower misses just one loan payment.

The variable-rate loans that private lenders offer can be tied to a specified interest rate index, like the prime rate, and their rates can vary depending on the changes to rate index. Chase, for example, charges interest as high as 13.5 percent on these loans.

Lenders Should Disclose All Fees

Tim Ranzetta, the founder of Student Lending Analytics, says lenders should be required to disclose any adjustments they make to an interest rate when a borrower misses a payment or when any other negative activity takes place on a borrower’s account.

Currently, lenders don’t disclose all the possible fees borrowers may be charged in the servicing and collection of their student loans, and lenders’ loan contracts don’t always inform borrowers of the borrower benefits promised in the lender advertisements, including the possibility of a borrower being charged a lower interest rate after graduation.

Ranzetta says, in addition to demanding that lenders fully disclose their loan terms, lenders should also be required to list their advertised benefits in the promissory note in order to contractually obligate lenders to offer their benefits.

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Student Loan Lending Still Going Strong

Student Loan Girl — Mon, 12 Jan 2009 23:34:00 GMT

Despite being hampered last year by a lack of investors and a lack of access to credit, federal student loan lenders are surviving the economic crisis — making the student loan market one of the few lending industries still able to thrive this year, The Wall Street Journal reports (“Tuition Ammunition: a Happy Lesson on Lending,” Jan. 6, 2008).

Proactive and swift action by the federal government, which guaranteed 18.6 percent more student loans for the 2008-09 academic year than the previous year, has helped the student loan industry avoid the decreases in volume seen by the mortgage and banking industries.

In addition to a move by the Treasury Department to infuse tens of billions of dollars into U.S. banks so lenders could issue new student loans, Congress passed legislation that allowed the federal government to buy up student loan securities from cash-strapped lenders.

The Ensuring Continued Access to Student Loans Act (HR 5715) was intended to help student loan lenders, allowing the government to buy loans directly from these lenders, and may have contributed to a 9.4-percent climb in loan originations for the 2008–09 academic year by lenders in the Federal Family Education Loan Program (FFELP). While the legislation has been in place, the government has purchased about $97 million in student loans and invested nearly $10 billion in student loan trusts, figures that are expected to grow before the end of this school year.

“What we’ve seen so far is that programs we have put in place are having the desired effect,” said Education Secretary Margaret Spellings. Although she’s optimistic that the government’s efforts to boost student lending are working, she said she’s not ready to “declare any victories.”

Credit Markets Hinder Private Student Loan Lenders

While federal student loan lenders seem to be riding out the economic storm, observers say it’s unclear whether the private student loan market, which is suffering greatly from the credit crunch, will experience the same success.

After the market for selling bundled student loan securities dried up, the Federal Reserve initiated a $200 billion program in the hopes of encouraging investors to continue buying these securities. Analysts say, however, that these efforts may not be enough for the private student loan industry to compete with the demand for and the availability of low-cost federal student loans.

Last school year, private student loans accounted for about $17.6 billion, just one-fifth of the $85.9 billion in total student loan lending, according to the College Board. This year, lenders and analysts estimate that private student loan lenders have done 25 percent less business.

Already 39 lenders have stopped making private student loans, and others have tightened their lending criteria, both of which may force financially struggling families to pursue more affordable higher education options, said Tim Ranzetta, president of Student Lending Analytics, an independent research and advisory firm. “The cloud of this financing issue,” Ranzetta said, “will push more [students] to state public universities and community colleges.”

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Direct Loan Program Gaining Ground on Bank-Based FFEL Program

Student Loan Girl — Wed, 29 Oct 2008 23:27:00 GMT

According to a recent survey of college financial aid directors, the federal government’s Direct Loan Program — through which families get federal student loans directly from the Department of Education — could eclipse the government’s now dominant Federal Family Education Loan Program by next school year.

The survey’s findings reveal that the bank–based FFEL program is losing its hold as schools’ loan program of choice, now that 168 FFELP lenders have suspended all or part of their federal student loan programs. Third-party lenders have continued to drop out of the FFEL program as the ongoing credit crisis has choked investor interest in federal student loans, crippling lenders’ ability to sell loans in order to originate enough capital to issue new ones.

Of the 416 colleges and universities surveyed in a Web-based poll by Student Lending Analytics, a company that provides colleges with financial aid advice, 6 percent of schools currently using the bank-based system plan to switch to direct lending for the 2009–10 academic year, and 29 percent are considering a migration to direct lending (“Direct Lending Could Overtake Bank-Based Student Loan Programs Next Year,” The Chronicle of Higher Education, Oct. 28, 2008).

If only 57 percent of those schools who said they were considering the switch actually made it, The Chronicle suggests, the Direct Loan Program would edge out the FFEL program as the leading supplier of federal student loans.

Currently, 1,458 colleges and universities use the Direct Loan Program, up from 1,010 colleges last school year, while the number of colleges using the FFEL program is down from 4,417 schools to 4,274.

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Government’s Direct Lending Program Sees 43-Percent Increase in Volume

Student Loan Girl — Wed, 03 Sep 2008 00:36:00 GMT

As cash-strapped lenders continue to drop out of the Federal Family Education Loan Program, the number of student loans originated for the 2008–09 school year through the government’s Direct Loan Program has increased by 43 percent, reports The Chronicle of Higher Education (“As ‘Crisis’ Deters Loan Companies, Direct Lending Sees 43-Percent Jump,” Sept. 2, 2008).

Lenders in the FFEL Program — through which borrowers take out federal student loans through private, third-party lenders including banks, state agencies, and nonprofit lenders — have generally accounted for 80 percent of all federal student loan volume, according to the House Committee on Education and Labor (“The College Loan Landscape,” March 2008).

But the Direct Loan Program, which provides loans to students and parents directly from the Department of Education, is gaining ground. As of August 8, the Direct Loan Program had already originated more than $10.84 billion in federal student loans at 1,156 colleges and universities. At this time last year, the direct-lending program, had originated just $7.55 billion in loans at 851 institutions.

And although the exact figures have yet to be released, the Education Department estimates that the Direct Loan Program, which has generally made up 20 percent of all federal college loan volume, will soon be comparable in size to the FFEL program. FFELP lenders have only issued $13 billion in federal student loans at 3,230 colleges and universities this academic year, compared to the $55.8 billion in student loans they originated at 4,612 schools last year.

So Far, A Smooth Transition to Direct Lending

Government subsidy cuts to FFELP lenders enacted by the College Cost Reduction and Access Act last September, as well as continued fallout from the subprime mortgage crisis, have led more than 100 lenders to suspend their participation in the FFEL program.

By April of this year, some 5.8 percent of lenders remaining in the FFEL program had switched over to the direct-lending program and another 19.3 percent said they were considering the switch, according to Student Lending Analytics, a company that provides financial aid administrators with data about lenders (“Drift Toward Direct Lending (Update),” Inside Higher Ed, April 30, 2008).

Although some lenders questioned the Education Department’s ability to handle an increase in loan volume through its Direct Loan Program, some financial aid administrators say the Department of Education has done well in handling the influx of business.

Anna Griswold, executive director of student aid and assistant vice president for undergraduate education at Penn State, says she has been “pretty pleased” with the Direct Loan Program and has not experienced any glitches. Penn State, the 10th-largest FFELP lender last year, became a direct-lending school this year after its FFELP lender, the Pennsylvania Higher Education Assistance Agency, stopped offering federal student loans in February.

Penn State borrowers have already taken out $100 million in student loans this year through the direct-lending program.

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