The Transparency Report: Private Student Loans

With implementation of Title X of the Higher Education Opportunity Act up to 2 years away, I wanted to evaluate the level of transparency that lenders are currently providing on private student loans. SLA recommends that schools analyze and rate the level of transparency of lender websites into their lender selection process. Why? It is difficult to make educated and informed decisions without lenders providing thorough, accurate and germane information about their private student loan products.

Earlier this year, Student Lending Analytics developed resources to help student borrowers make informed and educated decisions about private loans (note that SLA is an independent research and advisory organization that is not affiliated in any way with any financial institution):

• SLA 2008 Alternative Loan Guide provides money-saving tips and caveats to borrowers evaluating private loans.
• SLA Private Loan Options provides a list of major national and regional lenders with interest rates, fees and borrower benefits and is updated frequently.

OK, now back to the Transparency Report. Here is the goal: Answer four basic questions about private student loans by visiting five of the leading private student lenders' websites:

• What is the range of interest rates for a private loan for an undergraduate?
  • Index + Margin
  • Actual interest rate (or A.P.R.) based on current index
• What are the origination and/or repayment fees associated with this loan?
• What are my repayment options?
• Does the lender provide some disclosure that I should always seek federal loans first?
  • Related question is "Does lender clearly differentiate their federal and private loan products?"

Here is a brief summary of the findings from this analysis of transparency levels:

• Four of the five lenders provided a repayment table, which included information about the minimum and maximum rates of interest on their loans, A.P.R. (most did not indicate that these were minimum and maximum levels), and monthly payments.
  
  • Assumptions and details in repayment tables differed greatly by lender.
  • Each lender chose differing set of assumptions making "apple to apple" comparisons difficult
    
    • I recommend that the Federal Reserve in finalizing private loan disclosures require lenders to use similar assumptions to make comparisons easier.
    • A.P.R. provides an effective way to compare loan offerings; several lenders provided A.P.R. calculations for both in-school and repayment periods.

• Each lender provided information about origination or repayment fees.
  
  • None provided details about any fees associated with loans in repayment, such as late fees, insufficient funds fees or forbearance fees. I expect these can be found in promissory notes, but it would be nice to see them sooner.
  • One (Chase) indicated that its loan had zero origination fees but had a footnote suggesting that this only applied to qualified borrowers.

• Most lenders provided information about repayment options; although some were more detailed than others.
  • Few mentioned deferment or forbearance options.

• All mentioned federal loans in the paragraph introducing their private loan product.
  
  • Some provide links so applicants can directly access information on their federal loan products.

Sallie Mae Signature Loan

• What is the range of interest rates for a private loan for an undergraduate?
• Provides repayment table with following data:

APR examples

Interest rate	Disbursement fee	Repayment fee	Monthly payment amount	APR
One-month LIBOR + 4%	0%	0%	$119.70	7.01%
One-month LIBOR + 14%	3%	3%	$283.95	16.11%

APR assumptions:

• The Annual Percentage Rate (APR) is a variable rate and will increase if the one-month LIBOR rate increases. For purposes of this calculation, we have assumed that the interest rate does not change.
• The APRs shown are APRs effective as of October 27, 2008.
• A $10,000 loan amount.
• APR examples are based on a 15-year repayment of principal and interest.

• What are the origination and/or repayment fees associated with this loan?
  • Provides range of 0-6% on main Signature Loan page.
  • Provides link to page which identifies fees as origination (0-3%) and repayment (0-3%).

• What are my repayment options?
  • Provides actual repayment amounts in repayment table which assumes 15 year payment of principal and interest
  • Provides following detail on main Signature Loan page about repayment:
    
    • Several repayment plans are available, including standard, graduated, and extended.
    • Consider making interest payments while you are in school to lower the amount you must pay back.
    • Prepay your loan at any time without penalty.

• Does the lender provide some disclosure that I should always seek federal loans first?
  • Provides following disclosure at top of Signature Loan Page
  • "The Signature Student Loan is a popular after-Stafford loan. If grants, scholarships, and federal student loans have not covered the total cost of your education, Signature Student loans can help."

Citibank CitiAssist Loan

• What is the range of interest rates for a private loan for an undergraduate?
  • Provides following language on Rates, Terms and Fees Page: "Interest rates as low as 4.50% (4.42% APR)." For my opinion on "As low as" marketing, click here.

• Provides detailed repayment table:

APR Example for CitiAssist Undergraduate Loan

	Annual Percentage Rate Example Assuming an Interest Rate of 4.50%	Annual Percentage Rate Example Assuming an Interest Rate of 11.75%
Loan Amount	$6,000.00	$6,000.00
APR	4.42%	11.70%
Loan Fees	0.00%	5.00%
Principal Amount Entering Repayment	$6,855.00	$8,644.13
Finance Charge over Life of Loan	$4,408.80	$16,483.20
Monthly Payment (Principal & interest)	$43.37	$93.68
Repayment Terms (months)	240	240
Deferment Term (months)	38	38

• What are the origination and/or repayment fees associated with this loan?
  • Fees described on Rates, Terms and Fees Page as: "A loan fee ranging from 0.00% to 5.00% (APR examples) will be added to your principal balance. Adding a creditworthy co-signer to your application may help you qualify for a loan with no loan fee."

• What are my repayment options?
  • Described on Rates, Terms and Fees Page as: "The standard repayment term is 20 years plus any periods of deferment or forbearance. Learn more about deferments and forbearances as well as repayment plans. And, with Citi, there’s never a penalty for paying early or prepaying."

• Does the lender provide some disclosure that I should always seek federal loans first?
  • On their Loans for Undergraduates page is the following disclosure:  "Citi's wide variety of student loans and fast online applications will help you get the money you need to pay for college quickly to free up time for the things that matter to you."
• • Lists Stafford Loan first followed by Private Loan
    

Chase Select Loan

• What is the range of interest rates for a private loan for an undergraduate?
  
  • Provides repayment table:
    

Applies to Loans for Undergraduate, Graduate, and Graduate Health Professions Students
(Effective October 1, 2008 – Deceember 31, 2008) 

	Repayment Options*:Deferment
	Lowest Rate Deferred Payments	Highest Rate Deferred Payments
Amount Requested	$10,000.00	$10,000.00
Origination Fee	0.00% ($0.00)	0.00% ($0.00)
Lowest Interest Rate (rate as of 07/01/2008)**	4.50% (Prime - 0.50%)	13.00% (Prime + 8.00%)
Principal Amount of Loan at Disbursement	$10,000.00	$10,000.00
Deferment Period	30 months	30 months
Monthly Interest Payment (while in school)	N/A	N/A
Principal Amount of Loan at Repayment	$11,125.00	$13,250.00
Monthly Minimum Payment (after deferral period, if any, assuming variable rate remains constant)	$70.38	$155.23
Repayment Period	240 months	240 months
APR	4.45%	12.51%
Total Finance Charge	$5,766.74	$24,006.11
Total Amount Paid	$16,891.74	$37,256.11

• What are the origination and/or repayment fees associated with this loan
  • Indicates on Main Chase Select Loan Page:  "Competitive rates and no origination fees ⁺
    • Hmm, the footnote says "The offer for no origination fees is only available to qualified borrowers."; So, does this mean that certain other borrowers (the non-qualified ones) would be paying an origination fee?

• What are my repayment options?
  • Indicates on Main Chase Select Loan Page:  "Repayment can begin after graduation."

• Does the lender provide some disclosure that I should always seek federal loans first?
  • Provides following disclosure at top of Main Chase Select Loan Page : "Chase Select Undergraduate Loans are available to high school/GED graduates who are enrolled in a degree or certificate program at a participating school. Chase Select is a certified private education loan that can help fill the funding gap when federal loans, aid and grants just aren't enough to cover the cost of college.*
  • Also includes footnote:  "Important Information: As you determine the best way to finance your education, you should consider the full range of student financial aid options available. Private loans, like Chase Select, can be used when federal loans, grants and other forms of financial aid are not sufficient to cover the full cost of education."

Wells Fargo Collegiate Loan

• What is the range of interest rates for a private loan for an undergraduate?
  • Provides following repayment table:

The examples below are based on the following information:

• Loan amount: $8,000
• In-school period: 4 years
• Grace period: 6 months
• Repayment term: 15 years
• Prime Rate: 4.00%

Margin added to Prime Rate1	APR While in School and During Grace	APR in Repayment	Monthly Payment2
2.00%	5.45%	6.00%	$85.73
3.49%	6.65%	7.49%	$99.09
5.49%	8.20%	9.49%	$119.13
6.49%	8.95%	10.49%	$130.09
7.99%	10.03%	11.99%	$147.72
8.99%	10.74%	12.99%	$160.29

• What are the origination and/or repayment fees associated with this loan?
  • No origination, disbursement, or early payment fees.; Unlike some other lenders, we don't deduct anything from the amount you borrow."

• What are my repayment options?
  • Provides page dedicated to repayment options for private and federal loans. 

• Does the lender provide some disclosure that I should always seek federal loans first?
  • Note atop main page of WF Collegiate Loan page: "Many students find that federal loans aren't enough to cover their education costs. If you've received all the federal loans you're eligible for and still don't have enough, you can use a Wells Fargo Collegiate Loan¹ to borrow up to the entire cost of your education.

U.S. Bank No-Fee Education Loans

• What is the range of interest rates for a private loan for an undergraduate?
  • When applying for loan, required to click on Terms and Conditions, which include the following details about interest rates:
    • Interest rates are Prime + 0%, Prime + 2.95% or Prime + 4.95%¹, depending upon the credit history of the borrower. All rates are variable over the life of the loan.²
      • Footnote 2 provides index information, A.P.R. and monthly payment information for lowest rate (Prime + 0%):  Loan payment example assume a $10,000 loan at a constant interest rate of 4.50%, assuming 45-month in-school period, a six month grace period (i.e., a 51-month "interim period"), no reserve fee, and 15 years in repayment, would require a monthly payment of $91.10. The interim APR would be 4.20%; the repayment period APR would be 4.39%. This interest rate is effective as of 11/01/08 through 11/30/08, and assumes a Prime Rate value of 4.5%

• What are the origination and/or repayment fees associated with this loan?
  • Provides following verbiage on main No-Fee Education loan page:  "No application, administration or reserve fees (reserve fees are similar to federal loan guarantee fees that are deducted from your approved loan amount)."
• What are my repayment options
  • Main No-Fee Education Loan page indicates the following:  "Three repayment options."

• Does the lender provide some disclosure that I should always seek federal loans first?
  
  • Provides following disclosure atop Supplemental Education Loans main page:  " Congratulations on setting your educational goals! Financing them through U.S. Bank is a smart investment in your future. If you have not already explored the advantages of the Federal Stafford Student, Graduate and Parent PLUS loan programs before applying for a supplemental loan, call us at 800-242-1200 or talk to your school's financial aid officer."