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The Past, Present, & Future of the Private Education Loan Industry

Private education loans have been and may always prove to be a critical variable in the equation that establishes just how accessible a college education can be for families and students that don’t have the immediate resources (savings or income) to cover the expenses associated with higher education. In an effort to better gauge the impact of the private education loan sector on college accessibility, I recently had the opportunity to sit down and discuss the topic with Peter Carroll, General Manager of the Higher Education Division for Overture Loan Marketplace.

During our session, Peter did a wonderful job of answering all the questions that I threw at him and he painted a detailed picture of how the private education loan industry has evolved over the years and the role that it plays in higher education – now and in the future. So.. lets get started!

Question 1: How do you think the Private Education Loan industry has changed in the past couple of years?  Good changes? Bad changes?

The student loan industry has changed in very fundamental ways over the past couple years.

Most notably, students now receive their Federal Stafford and PLUS Loans directly from the Department of Education, relegating banks and credit unions to serving only as providers of private (or alternative) student loans.  Private loans are unsecured, credit-based loans and lines of credit offered by banks, credit unions, and state agencies that are meant to be a “last resort” if the student needs more money after maximizing their financial aid and federal loans.

What was an approximately $22 billion market in 2007 is now estimated to be only about $8.5 billion in 2010.  Much of the decrease in volume is due to the recent disruptions in the credit market and an increased emphasis by the government on making sure students first maximize their federal aid options – including higher limits on the amount students can borrow.

The change in the private loan market has mixed consequences.  On the good side, more students are seeking financial aid (free money) and fixed rate Federal loans prior to private loans.  That hasn’t always been the case.  Also, the market disruption has permitted new sources of capital such as credit unions and state agencies to enter the market with cheap and innovative products.  On the bad side, we hear of families who have had to settle for a college that is not their first choice due to the reduction in available loans to help them cover their costs.  Hopefully these cases are few and far between.

Question 2: Peter, based upon your experience, how would you gauge the importance of private education loans when it comes to college funding? Are you seeing an increase in use, has participation leveled off or do you actually see a decrease?

As we discussed above, we’ve certainly seen a decrease in use of private student loans, and all things being equal, that’s a good thing.  Generally speaking, if families are able to plan effectively, save money, think hard about the cost and payback of their education, and feel good about their choices, then there is no need for a private student loan.  Then again, there will always be students with great career potential who desire access to high quality education institutions, but have not planned as effectively from a financial perspective or have specific financial or other situations that result in less aid being available to them.  For those students, a private student loan may make sense.

Question 3: How easy is it for families and students to obtain private education loans? Has the bar been raised on credit standards? Do students need co-signers or can they get loans on their own?

It has become more difficult recently.  In 2007, even students and co-signers with FICO scores in the upper 500 ranges could find loans (albeit expensive loans).  Today the average lowest FICO score we see offered is 680 or above (again – the more expensive loans).   Students get the most attractive rates when FICO scores are in the 700 or above range.  So the bar has certainly been raised on some credit standards in the wake of the credit crisis of 2008.  While some students with an established credit history can get a loan without a co-signer, this practice should be avoided.  Having a credit worthy co-signer on your loan equates to better rates and terms and greater access.

Question 4: The Truth In Lending Act (Reg Z) was recently expanded to include private education loans. Has this extra step in the process been a challenge for lenders and students? Do you think it helps to educate families about exhausting all other options before utilizing a private education loan or is it just another part of the process that gets lost in the shuffle?

From a student’s perspective, we certainly don’t think the disclosures have hurt, but we’re also not sure how much they have helped.  In the age of Twitter, where students speak in 140 character phrases, it’s tough to imagine a student pouring over the entire TILA Model Application and Solicitation Disclosure.

Having said that, many of the disclosures do have value when students do take the time to read them. For example, the Self-Certification form that students need to sign before obtaining their private student loan may help save them money by reminding them of the necessity of applying for financial aid at their desired schools before even considering private loans.

At the end of the day, we’ve found that students tend to get their advice on loans from one of two main sources: their school’s financial aid office and Google.  We feel that policies that encourage the former are going to be far more effective in achieving the objectives of Congress and the TILA.  In our view, sending a student to Google for information on loans is like sending a student into a red light district for advice on morality.

Question 5: You work for a company (Overture) that has helped to simplify the private education loan process for a good number of families and students. Can you highlight some of the features provided by Overture that help to streamline what can often be considered a daunting task (finding and securing private education loans)?

The Overture Student Loan Marketplace is a national website that students can use to shop for private student loans from our growing network of participating lenders including national banks, credit unions, and state agencies. Our site allows a student and their co-signer to fill out one form and view accurate rates and terms for loan products that they are eligible to receive from the lenders in our network.  These are the actual rates and terms a student could expect to see if they were to apply with each lender individually.  The benefits to students and their families in 2010 have been amazing and include:

·         An average interest rate selection of 6.18% with zero fees compared to the industry average of nearly 10% or higher with fees.  This equates to thousands of dollars in savings over the life of the loan.

·         A huge reduction in time and frustration spent on the student loan process. Because students can shop for and compare their loan options in one place, we have boiled down a process that used to take days or weeks into 5 minutes.

·         Constant smart borrowing guidance to keep students’ total cost of funds low, such as first maximizing their financial aid and Federal loans before considering a private student loan.

Question 6: If you had to speculate, what do you think the future holds for the private education loan industry? Will it expand? Will it shrink? Will it be replaced by government backed loans (the limitless federal direct loan)?

It’s hard to imagine the private student loan industry shrinking much further than it has.  Cost of attendance continues to rise at most colleges and universities.  But we’ve also seen many schools make great strides to reduce their operating cost, which makes room for larger budgets for financial aid assistance.  So we think the private loan industry is likely to level off this year and resume very slow growth thereafter.  In Congress and in the Obama administration, there seems to be a greater emphasis on fiscal restraint on both sides of the aisle.  This suggests that a limitless Department of Education balance sheet for student lending won’t be a very practical concept and private loans will remain a piece of the education financing puzzle.

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  1. […] a recent interview with Doug Schantz, founder and editor of CheapScholar.org, Mr. Carroll states that these loans, which are provided by […]


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