Lender incentives to decrease

Got a note from my lender saying that since the feds cut their incentives, the lender will reduce incentives to us. It is likely that other lenders will do the same (to some degree?). This will take effect after the current financial aid year.

For instance the lender below was offering a 1% rate reduction on unsubs, but will no longer offer it after the current financial aid year unless feds re-instate their incentive. If you're currently in school and not graduating soon, check with your lender to see if they will discontinue incentives on any future loans. This should not effect existing/current loan incentives.

Text from lender follows:
Thank you for utilizing Graduate Leverage to mitigate your student debt burden. As part of our advisory service, we provide periodic updates on market rates and regulations. This is a general informational update and thus does not require any action on your part.

Regulatory Update

The recent passage of the College Cost Reduction and Accessibility Act has resulted in several significant changes for the federal student loan program.

Below is a brief overview of some of the changes impacting graduate students:

·Creation of Income Based Repayment Plan (IBR): A new government program available in 2009 provides a significantly reduced federal loan payment and potential savings on subsidized interest for qualifying individuals. IBR limits your annual debt payment to 15% of your discretionary income. Any interest on your subsidized loans not covered by your reduced payment is paid by the government for up to three years.

·Lender Subsidies Decreased: Future borrower benefits for federal loans will likely diminish across the industry as a result of the significant cuts to the fees lenders receive from the government. The benefits on your current loans with Graduate Leverage will not change.

Interest Rate Update

·The Federal Reserve has lowered the federal funds rate three times in the past quarter; on September 18, October 31, and December 11. As a result, the prime rate is now 7.25%. This affects all private (alternative) loan rates and creates an environment in which a private loan may be more attractive than a Graduate PLUS for some students.

Graduate Leverage is continuing to monitor the market, and will be sending your personalized recommendation to assist with loan selection early this spring. If you have any questions or need assistance, please call 888-350-8488.

Sincerely,

The Graduate Leverage Team

TMP-SMX said:

Because T.H.E. actually gives out their benefits unlike 80% of other lenders. Still a pretty nice deal at 1.3% during repayment. I won't be too happy if they remove this benefit since it won't take effect for 3.5 or more (hopefully) years.

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Unfortunately it may be sooner than that. The reduction in benefits will take place for any loan disbursed after 10/1/2007 when the president signed the new legislation into effect. Specifically, THE, states here that they are reviewing their repayment incentives. I hope they'll continue to offer it, because grad leverage flat out says they won't for next year. Note there is no backdating so the terms you previously held loans still hold. It's the future disbursements (so next financial aid year) that this will effect.

TMP-SMX said:

So since there are two disbursements this year my first will have a 5.5% rate and my second will have the 6.8% rate at repayment? Or will both of them have the same 5.5%/6.8%.

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What my lender said is the second disbursement for Spring 2008 is still considered the same financial aid year 2007-2008, so the same old rule applies. My guess is T.H.E would be similar but check with them.

I don't usually take out the max on my unsub. But my plan is to front load for Fall 2008 so as to get the better rate. Now my financial aid officer said I could wait till the very end of Spring 2008 to draw out the rest of the unsub. This way the clock starts ticking a little later - or a little earlier depending on how you look at it.

Doctor Bagel said:

Well, I guess I was wrong. T.H.E. has suspended their bonus program for all lendees, and the suspension is supposedly temporary (sure). I guess there was a catch for going with them.

http://www.northstar.org/bonus_terms.aspx

Adding that I am curious to know if we have any right to force them to make good on their promise to us. We relied on that bonus when picking T.H.E. as a lender. Getting rid of it is essentially violating our deal with them.

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New financial aid year = new set of rules/incentives. However, if you took out less money then was offered in the current FA year, then the lenders are obligated to honor the terms that you signed up for. So, for instance I signed up with Grad Leverage @ 5.8%. I didn't take out the entire amount I was awarded. I can go back and take out whatever is left for the current FA year. Moreover, AFAIK, lenders can't retroactively take away what was agreed upon. So my current loans (from the current FA year) @ 5.8 will stay there. New loans for the next FA year will have the full 6.8%.

Colleges Turn Away From Private Lenders

[FONT=Times New Roman,Times,Serif]As Cuts in Subsidies to Banks Eat Into Benefits for Students,
Schools Start to Migrate to Federal Direct Loan Program.
[FONT=times new roman,times,serif][FONT=times new roman,times,serif]By ROBERT TOMSHO
March 25, 2008; Page D1.
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Schools like Augustana College, in Rock Island, Ill., are taking another look at the federal government's direct student-loan program.
For years, the small liberal-arts school relied on private lenders to make federal loans to its 2,500 students. Guaranteed by the government under the Federal Family Education Loan, or FFEL, program, such private loans routinely came with benefits like discounted loan-origination fees and lower interest rates for graduates who made automatic payments.
But recently, many lenders told Augustana they could no longer promise to provide such benefits, citing cuts in the federal subsidies they receive and troubles raising capital in the securities markets. Coming on top of last year's ethics probes of the student-loan industry, it "really changed our whole outlook," says W. Kent Barnds, Augustana's vice president of admissions and enrollment.
Problems are mounting in the student loan business, as many lenders have stopped providing loans through the Federal Family Education Loan program and other institutions may not be able to step in with support. WSJ's Liz Rappaport reports. This fall, Augustana will stop doing business with FFEL lenders and join the federal direct-lending program. Under it, students borrow from the federal government through their colleges, and private lenders are eliminated from the picture.
So far this year, nearly 60 other institutions have moved to direct lending or applied to do so -- including the mammoth Pennsylvania State University system, with its 85,000 students; Boston's Northeastern University; Ohio's Mount Vernon Nazarene University; and Northern Illinois University. "I think we are going to start seeing a lot of schools switch over," says a congressional staffer who has worked on the financial-aid issue.
The federal government sets the interest rates and benefits for direct student loans. It sets maximum interest rates for FFEL loans, although lenders are free to offer discounts and benefits of their choosing. Because the two programs involve different processing systems, few institutions actively participate in both and students rarely get to choose between them.
Private lenders still dominate the federal student-loan market, estimated at $114.8 billion in fiscal 2007, which includes Stafford loans for students, PLUS loans for parents and graduate students, and consolidation loans for borrowers seeking to combine previous student loans under a single lender. About 4,500 colleges and other institutions actively take part in the FFEL program, compared with just over a thousand for direct lending. In fiscal 2007, private lenders provided about 82% of all federal student loans.
But for the many students whose schools don't participate in direct lending, borrowing stands to be more expensive for the 2008-09 academic year, as private-lender rebates disappear. Additional disruption could erupt if lenders now accepting FFEL loan applications withdraw from the program before the school year starts.
Financial-aid administrators say it is more important than ever to shop around for a lender and not to wait until summer to do so, as many students and parents traditionally do. On the political front, Democratic presidential contenders Hillary Clinton and Barack Obama have both indicated that, if elected, they would eliminate the FFEL program in favor of direct lending.
Many college administrators say the FFEL program still offers advantages. Sarah Bauder, financial-aid director of the University of Maryland, says private lenders and loan-guarantee agencies spend time educating students about personal finance and debt. "They work with the students from the moment they get their money," she says, adding that such efforts have helped Maryland maintain a 1.4% loan-default rate, compared with 4.6% nationwide.
But big lenders such as College Loan Corp. and the Pennsylvania Higher Education Assistance Agency, or PHEAA, have said they will stop making FFEL loans for the fall term. Monday, Brazos Higher Education Service Corp., in Waco, Texas, announced it too would suspend making new loans. And with investors shunning securities backed by student loans -- a key source of capital for lenders -- a continuing exodus of lenders could prompt more colleges to consider direct lending.
No Crisis Foreseen
For the moment, most observers don't foresee the sort of crisis in FFEL loan availability that could spark a wholesale rush to direct lending. Although students won't begin borrowing in earnest for the 2008-09 academic year until late spring, Department of Education officials have yet to spot any problems with loan availability, and lending volume for both federal programs has been typical for this time of year.
Financial-aid professionals say nearly 2,000 lenders are still making FFEL loans, including big banks that aren't solely dependent on securities markets for funding sources.
Penn State, for one, isn't waiting to see what happens. About 40,000 of its 85,000 students have federal loans through PHEAA, which in recent years provided about 90% of all federal loans at the school. Faced with calls from worried families and the challenge of quickly finding new lenders for thousands of students, Penn State earlier this month opted to switch to direct lending.
Congressional leaders want the Bush administration to make sure the direct-lending system is ready to take on additional loan volume on short notice if many other schools follow Penn State's lead. Although the direct-lending program was occasionally plagued by processing delays in the late 1990s, Mark Kantrowitz, publisher of FinAid.org, a financial-aid Web site, says those problems appear to be resolved.
Department of Education officials believe they could readily handle double the $13 billion in direct loans they processed in fiscal 2007, although a bigger increase is likely to require more planning.
The Clinton administration rolled out the direct-lending program in 1993, aiming to eventually make it the only source of federal student loans. But congressional supporters of the private lenders blocked those plans and, since 1996, the number of active direct-lending schools has declined 20% to 1,051 as private lenders lured colleges away by promising speedier loan processing and better lending terms.
But along the way, some were also offering colleges and their administrators the sort of travel junkets, financial perks and alleged kickbacks that sparked last year's conflict-of-interest investigations by Congress and New York Attorney General Andrew Cuomo. As a result, dozens of schools adopted tighter ethics codes and Congress last year passed the College Cost Reduction and Access Act. It sliced more than $20 billion of the federal subsidies that have given private lenders a competitive edge by allowing them to offer better loan terms, roughly halving them.
"The scandal contributed to the political environment that made the deep cuts possible," says Kevin Bruns, executive director of America's Student Loan Providers, a trade group representing private lenders. He maintains, however, that compared with direct lending, there are still bargains to be found on the FFEL side.
Narrowing Differences
Yet the competitive differences between the two programs are narrowing. The federal government is phasing out its loan-origination fees, which private lenders used to pay on borrowers' behalf, and is offering rebates to borrowers in the meantime. A 2005 federal law set the interest rate for direct PLUS loans for parents and graduate students at 7.9%, compared with a maximum of 8.5% for FFEL loans. And the direct-loan program is offering a new perk for borrowers who take public-service jobs, such as teaching: If graduates work in public service for at least 10 years, they get their loans forgiven.
On the FFEL side, interest-rate discounts are harder to find and benefits have been trimmed. MyRichUncle, the lending concern owned by MRU Holdings Inc., is offering undergraduate Stafford loans with a 5.8% interest rate -- a full percentage point below direct Stafford loans -- but the lender will no longer discount interest rates on federal PLUS loans.
Meanwhile, Cleveland-based KeyCorp has eliminated most of its benefits to borrowers, Wachovia Corp. has reduced the maximum rebate that Stafford borrowers can get for on-time repayments, and Wells Fargo & Co. has eliminated some so-called back-end benefits, such as immediate interest-rate reductions at repayment.

Write to Robert Tomsho at [email protected]



http://online.wsj.com/article/SB120639948652760737.html?mod=todays_us_nonsub_pj