Interest Rates are dropping? time to get a private loan?

June 18, 2010 · Posted in Access Funds · Comments Off 

If you are a follower of the financial aid and student loan industry, you have seen that there has been a recent upheaval in regards to how federal student loans are distributed and increased downward pressure on interest rates. In addition, a planned interest rate reduction for federal subsidized Stafford loans goes into effect in July 2010, from 5.6% to 4.5%. In July 2011, there will be another planned rate cut to 3.4%.

Thanks to the Student Aid and Fiscal Responsibility Act (SAFRA) passed into law in March, private banks will no longer be allowed to originate federal student loans for students attending schools that are affiliated with the Federal Family Education Loan (FFEL) Program. The effect of this new bill is that as of July, the banks participating in FFEL will be losing a substantial revenue stream and will start to look elsewhere to recoup the lost income. Due in part to these changes, banks are lowering their interest rates and fees to attract borrowers that ordinarily may not be as keen to apply for a credit-based loan.

You may be wondering, “What does that mean for me?” Two main things:

1) Lower interest rates = less money paid over the life of the loan

2) Historically low index rate = potential to pay more over the life of the loan

Sounds counter-intuitive, right? Let’s break down the terms and uncover the hidden meanings.

Interest Rate: the percentage of a sum of money charged for its use; this number is usually derived from a variable index rate plus a “margin”

e.g. If you lent me $100 for a year at 5% interest, when I pay you back… the total will be $105. That $5 is what you charge me to borrow the money.

Index: A statistical indicator that measures changes in the economy in general or in particular areas. In the case of student loans, the federal funds rate and London Interbank Offered Rate (LIBOR*) are typically the most commonly used indices (The Free Financial Online Dictionary).

*If you want to learn more about LIBOR and the federal funds rate, they are published daily in the Wall Street Journal and are available online from a wide variety of financial websites.

These indices change over time depending on how the economy is performing. If the economy is great, they tend to be higher; if it is doing badly — or in our case, recovering from an intense global recession — they tend to be lower. These changes are all methods of financial controls to help expand or slow down the economy. If you do not have a background in economics, the important thing to remember is that the Fed does not want our economy to grow or shrink too fast; stable, gradual growth is always preferred over rapid growth because it constitutes lower financial risk and is easier to forecast.

Now that you know what these terms mean, I invite you to think about how a historically low index rate might affect your student loan. To get a firm grasp, there are a few key points you need to keep in mind:

1) All private student loans have variable interest rates (meaning they change); generally the rates are re-adjusted every 3-6 months

2) Low index rates = recession economy or an economy that is set for high growth

3) Interest rates are at least partially based on index rates

When you connect the dots, you see that there is a distinct possibility that as the economy improves, so will the indices. The result? Your variable interest rate will rise along with the index and cost more money in the long run.

Sounds kind of negative, right? Not necessarily. Due to these historically low index rates, you can actually get a private student loan (assuming you have a good or excellent credit score, or creditworthy co-signer) at interest rates lower than a federal Parent PLUS loan. The game here is really finding a loan that has the best of all worlds. In this case, you want to find one that has a low “margin” number. You know when you see a loan offer and it says something like LIBOR + 3% or Prime + 2.5%? That “+X%” is a margin.

Thus your objective, daring loan seeker, is to find a private loan that has both a low margin and low to medium index rate. The more stable the index is, the more stable your interest rate will be. Keep in mind that you are under no obligation to accept the first loan offer you receive and have a 30-day window to apply for loans without taking a credit penalty. As a responsible borrower, you are encouraged to shop around for loans and find a product that matches both your needs and financial capability. PrivateStudentLoans.com has an excellent loan comparison tool for this purpose. Explore all your options before making a choice and best of luck in your academic pursuits!

Evan Jacobs is a Student Advocate currently employed by the Student Loan Network team. He has intimate personal experience with financial aid and seeks to provide the best information and most level playing field available for existing and new students looking to finance their education.

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Private Loans: Rates And Fees

May 22, 2010 · Posted in Access Funds · Comments Off 

Many private loans are the variable-rate loans, providing interest rates and varying by lender. The rate of interest may adjust annually, quarterly, or monthly, at other interval as indicated by the lender.

The rate of interest on a private loan is often determined by joining a changeable index (for instance, T-bill or LIBOR) to a settled margin. The margin utilized to define the student loan rate of interest can differ depending upon your own creditworthiness. Borrowers that are considered more creditworthy usually qualify for the lower margins (and so lower rates of interest).

Fees, such as interest rates, will vary by lender as well. The kinds of fees evaluated, and the amounts charged, will count on the lender as well as may depend upon your creditworthiness too.

Here you will find some typical lender fees that you can run into, but bear in mind that not each lender will alter all the fees:

1. Application Fees: The fee charged in order to apply for the private student loans. Actually, paying the application fee does not guarantee your application approval.

2. Origination Fees: The fee charged for a lender to provide you (“originate”) the private student loan. Actually, origination fees are typically added into the loan amount. Also, the origination fee that you pay can differ depending upon the creditworthiness — the borrowers with much stronger credit can pay far lower origination fees than the borrowers having weaker credit.

3. Repayment Fees: Counting on the creditworthiness, the lenders may evaluate a repayment fund charge when the private student loan will go into repayment.

Joey Chee is a teacher with five years experience teaching history and literature who provides custom writing help. Joey is always ready to provide writing services and free plagiarism check to students of all levels.

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