FAP848: How to shop around for student loans

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FAP848: How to shop around for student loans

28 July 2008 1 views No Comment

FAP848: How to shop around for student loans

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Student Financial Aid News
+ NY Times: Banks struggling to recover from multibillion-dollar losses on real estate are curtailing loans to American businesses, depriving even healthy companies of money for expansion and hiring.
+ Two vital forms of credit used by companies — commercial and industrial loans from banks, and short-term “commercial paper” not backed by collateral — collectively dropped almost 3 percent over the last year, to $3.27 trillion from $3.36 trillion, according to Federal Reserve data. That is the largest annual decline since the credit tightening that began with the last recession, in 2001.
+ There’s a bunch of banks that are distressed, but here’s an interesting sidenote – IndyMac, the bank that went bust a few weeks ago, wasn’t on the FDIC watch list at all, and even sites like BankRate.com fail to predict unstable banks.
+ In this kind of environment, keep deposits under the FDIC insurance limit, and if you’re trying to get a loan of any kind, make sure your credit is in top shape first, and expect to potentially be declined even with good credit, not because you did anything wrong, but because the bank you spoke to may be financially on the brink of failure
+ If you’re applying for student loans, federal student loans such as the Stafford loan and PLUS loan are your best bets for approval, as Stafford loans have no credit requirement and PLUS loans have relaxed requirements; both are backed by the federal government, which means banks may be able to sell them more easily.
+ NY Times: Comparison shopping for a private student loan? Doing so may damage your credit score. In few other areas of consumer life are you at risk of being penalized for seeking out the best deal. Indeed, mortgage and auto loan seekers who comparison shop within a relatively short period of time do not see their credit scores suffer. But Fair Isaac, the company that helps credit bureaus calculate credit scores, does not extend the same break to private student loan applicants or their parents, who often co-sign for loans.
+ While Fair Isaac has mined years of data to determine that people making a bunch of mortgage and auto loan applications over a short period are almost always innocently shopping for a loan, it hasn’t declared student loan shoppers similarly safe.
+ In the meantime, lenders could help a lot by doing the following: First, state on their Web sites which credit bureau or bureaus they are using. Then, state whether that credit bureau is classifying their requests in a way that could damage an applicant’s credit score.
+ For the record, the Student Loan Network primarily uses Experian, and to the best of our knowledge, because we work with major banking partners like Discover Financial Services (ticker: DFS), Lehman Brothers (ticker: LEH), etc., your credit score shouldn’t take any additional hits beyond the standard first hit when you begin shopping around.

Scholarship Update
+ Running a survey on our site, Student Scholarship Search. Please take a few moments.
+ Scholarship Points $1,000 drawing for July happens in just 3 days!

Financial Aid 101
+ Shopping around for student loans
+ For federal student loans like the Stafford and PLUS loan, thanks to the credit crunch and the CCRAA, there’s no fundamental difference among federal student loans any more. There used to be borrower benefits, but no one really has those any more. The only metrics left are things like customer service.
+ For private student loans, shop around primarily based on rates and benefits. Look for, obviously, the lowest rates available, but base this not on the best published rate, but the spread.
+ For example, our spreads are in the range of LIBOR + 3.5% to LIBOR + 7.75% (some variations) – that makes us not as good a deal if you have perfect credit but a pretty good deal if your credit isn’t perfectly spotless
+ Different lenders use different base rates – some use Prime instead of LIBOR, which lets them publish rates like Prime + 0%, which looks fantastically than LIBOR + 3.5%, until you dig in and find that PRIME + 0% is 5%, and LIBOR + 3.5% is 5.5%.
+ Compare fees, too. What’s the origination or guarantee fee?
+ Compare benefits – is there deferment? Forbearance?
+ There’s been a lot of talk about peer to peer lending, which tends to be a non-beneficial model. Peer to peer lacks the interest tax credit, since they’re not qualified education loans, so you lose that tax benefit. Some have very short repayment terms, 3 years, meaning you have to repay while you’re in school. Others have astonishingly high fees, especially if you have poor credit; Prosper has an average interest rate of 26.1% and for poor credit, 31.88% – which is worse than virtually every credit card out there. Some of these loans also don’t offer deferment or forbearance at all (as of July 28, 2008).

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