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Things You Should Do and Know When Choosing A Lender In The New College Cost Reduction & Access Act of 2007 Era

Selecting a student loan provider can be as an important decision as selecting the school to attend. In the wake of revelations of financial aid misdeeds by at a handful of financial aid officials and lenders some schools have dropped their "preferred lender" lists. Other schools are doing away with these lists to emphasize their neutrality. Although one should not blindly choose from a preferred lender list it represented a good often vetted starting place. Now with less information, tuition and fees rising at more than double the rate of inflation, students and parents are left to navigate the confusing student loan world largely on their own.

The first step in choosing a lender is understanding the importance of “optimizing” debt. Long-term success is enhanced when you “optimize” the financing of your undergraduate, graduate and medical education. Optimizing the financing of your education requires that you:

Carefully select and enroll in a school that provides for your best opportunity to graduate and meet all licensing requirements;
Critically think about and understand money, debt and deferred gratification;
Borrow less and only what you need for the education basics - not to support a lifestyle;
Select the most cost effective advantageous means to pay for your purchases;
Smartly utilize money saving strategies such as low rate consolidation, loan forgiveness, cancellation and service repayment;
Live below your means;
Manage and maintain your credit history and score; and
Eat, exercise, spend, save and invest intelligently.

By law, you can choose any federally approved lender you wish, unless you are attending a Direct Lending institution where the loans can only come from the federal government. Schools are required to value your request and help you in making the loan process easier.

It is your responsibility to gather all of the information before making the decision for yourself. Be cautious when performing your due diligence and researching lenders online because not all lenders are alike and some pay to be on recommended financial aid site list.

As a result of the New College Cost Reduction and Access Act subsidy cuts, many student-loan lenders are cutting or eliminating borrower discounts on new federal loans and consolidation, which in turn will raise the student cost of paying for her/his education. Since the subsidy cuts were not as drastic for non-profit lenders, borrowers may still be able to find loans with discounts. However, just simply being a non-profit lender does not guarantee good benefits. There is much more to obtaining the “best” loan for you than the lowest interest rate. In general, low cost, easy access, flexible options, and quality service are key elements to consider in selecting a lender.

Here is an extensive list of questions to ask, and things you should look for, know and do when choosing a student loan and lender.

Cost, Fees, Interest Rate:

Determine all of the costs associated with getting a loan, especially a private student loan? Cost includes but is not limited to origination, disbursement and repayment fees. How are the costs/fees and interest rate calculated and capitalized over time? You can find calculators on www.Finaid.org to help you figure this out.
What will your actual interest rate be? Most ads quote “rates as low as” or note the rate range based upon credit history and score.
Ask “What is your lowest interest rate and fee combination and how can I get it and what do I have to do to keep it?”
Is the rate fixed or variable?
If variable when and how often is the rate reset – monthly, quarterly or yearly?
Is the rate for a limited time only, or is it for the life of the loan? If for the life of the loan can I get the guarantee in writing?
What interest rate index or formula is used to set the rate?
Is there a limit on how high the variable rate can go?
What interest rate can I get on a fixed rate loan?
For variable rate loans find out and understand the index, such as Prime or LIBOR rate, which rate adjustments will be based.
Is the interest rate Prime, LIBOR or some other rate or formula? Historically LIBOR rates are lower and move slower than Prime rates.
The 3-Month LIBOR historically has had the most stable and lowest rate over the life of the loan. Over the past ten years, LIBOR has been less volatile and an average of four points lower than the prime rate. Of course past performance is no indication of future results.
How often is loan interest capitalized? Lenders that capitalize interest only once when the loan goes into repayment will save you more money than lenders that capitalize more frequently. The more lenders capitalize interest, the more interest you have to pay.
How long is my repayment period?
Is there any penalty for paying off the loan early?
When does repayment begin?
How long can payment be defered?
How long can payment be deferred while enrolled in school?
How much will you owe when you start making payment? It’s important that you also research and make a good estimate at how much will you be earning when payment is expected to begin. Student loan repayment is best managed when monthly payments are less than 12% of gross monthly income.

Benefits:

Benefits are very important because they will allow you to save money and make a loan more affordable. Your student loans are a long-term commitment. Making an informed decision is imperative to your ability to successfully manage your debt. Start early so you don’t have to rush, gather as much information as possible and make your choice wisely!

The challenge may seem daunting, but don’t take the first loan option offered. Ask plenty of questions, take notes and arm yourself with as much information as possible. Keep in mind that lender’s terms and benefits may change over time so it is a good idea to look around every year at potential lenders. There is no inherent benefit to keeping the same lender all through your schooling — especially if you plan to consolidate after graduation.

What borrower benefit programs are offered?
Look for front-end benefits such as the reduction or waiver of origination and guaranty fees, which are usually taken directly from the amount of the loan. Such benefits can put a bigger check towards your tuition. Although new legislation is eliminating many lender’s borrower benefits, be sure to ask if the lender will reduce or waive these fees.
Look for back end benefits where money is saved during repayment.. Again new legislation is eliminating many lender’s borrower benefits such as interest rate reductions for on-time payments, auto debit payments or making the attainment and maintenance of such benefits more difficult it is something you should check to see if available.
Will the lender offer deferral throughout residency?

Tip: You can lower the interest rate on a PLUS or Grad PLUS loan by consolidating. Once you have been in school for two years, consolidate your PLUS loan and only PLUS loans every year. Although the PLUS loan is now fixed at 8.5% the maximum interest rate for consolidated loans is capped at 8.25 percent. By consolidating, you will save a quarter percent. If you include other federal loans the interest rate will be the weighted average of the loans rounded up to the nearest one-eight of one percent not to exceed 8.25%.

If loan fees are rebated when and what principal amount are the rebates based – original balance or balance due?
How and when is the interest rate or fee reductions earned?
When and how is the rate or fee reduction applied?
Is the rate reduction immediate?
Is the fee reduction immediate?
Once borrower benefits have been earned, are the benefits permanent?
What will you have to do to keep your benefits?
If a benefit is lost, can it be re-earned or are the benefits lost forever?
Will using deferral or forbearance time affect benefits?
If your loan is sold, will it retain the benefits?
What happens to your eligibility for benefits if you consolidate your loans?
Do you have to repay earned benefits if you consolidate your loans with another lender?
Is their a special lender code to be used to be eligible for and access the advertised borrower benefit programs?
Does the lender offer flexible repayment options such as graduated, interest only, income sensitive or income contingent repayment?
What is the estimate on savings from qualifying for the borrower benefit programs?
Carefully review this estimate and underlying assumptions producing the savings. If you are not comfortable with doing the review, ask your financial aid officer or a MEDebt Solutions counselor to go over the estimate with you.
What is the percentage/proportion of borrowers who qualify for each of the lender’s borrower benefit programs?
Will you lose any benefits if you make one late payment?
Will you lose any benefits if you pay off your loan early or consolidate with the lender or a different lender?
Will you lose your benefits if you change your repayment schedule?
What is the grace period for payments?
Where are the detailed terms and conditions for your loan discounts and benefits (fine print) disclosed? Many lenders attach so many strings that most borrowers never actually receive the benefits.
Are the discount benefits guaranteed or are they subject to change later?
Will the lender provide/confirm the “lender provided” borrower benefits, terms and conditions in writing?
Will the lender provide you with an amortized repayment schedule showing you what the loan will cost and your monthly payments under the various repayment plans? This will make it easier to compare lenders with different types of incentives.
Depending on where you live and study, a non-profit lender may still provide some borrower benefits. Since the subsidy cuts were not as drastic for non-profit lenders, depending on where you live and study, borrowers may be able to find loans with discounts. However, do not assume that just simply being a non-profit guarantees good benefits. Considering all of your financing options, select the loans and lenders that FIRST BEST FITS YOUR NEEDS. THIS MAY or MAY NOT BE the CHEAPEST over time but it should be competitive.
Think in terms of buying an car, after doing your research you know the good competitive price range. You may still select a dealer with a slightly higher competitive price because of their reputation for service, proximity to your home or office and the fact that they do the little things like provide free car washes every weekend. Consider lenders that are competitive and provide top customer service.

Lender Services, Performance and Information:

If your school still has a preferred lender list, ask the financial aid office how they screened the lenders on the list.
Does the financial aid office have any arrangement with preferred lenders or were the lenders chosen by performance?
What were the documented performance criteria?
Talk to fellow students, particularly those ahead of you or recent graduates. Who did they use and were they happy with them?
Use the Internet – research any lenders that look promising.
Before applying for a private student loan or Grad PLUS obtain a free copy of your credit report from just one of the reporting bureaus from www.anual creditreport.com.
Particularly for private student loans, how easy is the application process?
How long do you have to wait to find out if you are approved?
It there a second-chance/review appeals process if your application is not approved?
Do you need a co-signer?
What are the criteria for release of a co-signer?
Does the lender offer a full suite of electronic services to borrowers via the Internet, such as online applications, e-signature, paperless processing, instant credit decisions, electronic disbursement of funds, online certification, 24-hour voice response system, online bill presentment and payment, credit/bank card payment and online access to accounts which provides students with an easier and more efficient way to manage all of their transactions? This also can make it easier for school personnel serving these students.
MEDebt Solutions discourages online consolidation application until after you have consulted with a Consolidation Counselor. Online applications should be submitted only after consultation with a knowledgeable consolidation counselor..
How long has the lender been in the student loan business?
Is the lender a financially secure company? Calculate the Current Ratio of the lender which is a simple and one of the most important of all financial ratios. It allows you to see quickly whether the company has on hand enough money (or assets that can be converted into money quickly) to pay its bills in a timely way. A company's current ratio is derived solely from its balance sheet and is calculated with one easy formula: short-term assets divided by short-term liabilities. The higher the resulting number, the more money the company actually has on hand at any given moment to pay its bills.
Understand and remember that with consolidation the fixed interest rate is determined by a federally mandated weighted average calculation that every lender must use. As a federal program the rate is mandated by law and so stated in the Promissory Note. Any change to the federal promissory note invalids the federal guarantee. The base interest rate should be the same no matter which company you work with. Lenders however, may provide “add on” benefits and as such discount the rate you pay by giving up some portion of the interest or subsidy they receive, thus lowering their profits. The recent reduction in subsidies has directly led to the reduction in borrower benefits.
The term of your federal consolidation loan is also determined by the federal government based solely on your loan balance. Your base interest rate, length of loan and deferral benefits will be the same no matter who you call.
Those with a combination of fixed and variable rate loans should carefully evaluate the benefit of consolidating the two together especially if you have locked in historic low interest rates in a previous consolidation. Consult with a consolidation counselor to review any implications particular to your unique situation.

Servicers:

Loan servicing is a very important factor to consider when choosing a lender. Since the standard repayment period on a loan is 10 years, you will have a relationship with your lender for at least that length of time.
Who services the loans?
Many/some lenders use loan serving agencies, or servicers, to handle the processing of payments and customer service requests.
You will need to find out which secondary markets or servicers different lenders use in order to know how good or bad the customer service will be once repayment begins.
Does the lender sell their student loans? If yes, when (after disbursement) and to whom?
If the loan is sold, when will the sale occur and how will you be notified?
Who performs the customer service for the servicer and what kind of training or qualifications do they have?
Who guarantees the loans?
Who holds the loans?
Are the customer service representatives of the lender and servicer knowledgeable about the career and income pathways of medical students, residents, attendings, fellows and practicing physicians?
Is the lender compliance certified and can you get a copy?

Customer Service - The Deciding Factor:

Is the customer service good?
Research lender/servicer competency in customer service and only consider choosing one with a good reputation.
Are customer service representatives readily available when needed?
Will the lender offer deferral throughout residency?
Are the customer service personnel friendly and knowledgeable?
Do the customer service personnel take the time to fully explain all options or just rush to get you to complete the application?
How quickly are phones answered?
How hard is it to get an actual person on the phone?
If you must leave a message, is your call returned promptly?
Are customer service hours convenient for your schedule?
Do the lenders/servicers designate individual customer service representatives to work directly with you so that you have access to help when needed, from a person who understands your specific needs? Given the new legislation and resulting cutbacks, very few if any lenders/servicers will be able to maintain individualize customer service.
Is extra effort put forth to help improve financial literacy and avoid default? Even though it is the responsibility of the student to repay any loans, the better lenders put forth extra effort to help borrowers improve their financial literacy and avoid default. A loan is considered in default if it has been in delinquent status for 270 days. Better lenders offer default avoidance programs, and some send numerous letters and will make numerous phone calls to borrowers who are about to go into default. You never know what kind of circumstances you will be in when repayment begins, so try to pick a lender that puts forth the extra effort to help avoid default.
Are debt management and other borrower education services available?

Intangibles:

Choose a lender who will treat you as a valued customer. This is another area where your school’s financial aid office can be handy. Students will often ask for their help when they have a problem with their lender, and they may be able to tell you some lenders to avoid.
Check with the experiences and level of satisfaction of recent grads, other students and past borrowers.
Consider legitimate and unpaid testimonials, recommendations and endorsements from trusted sources – use your gut instincts as well.
Do not be influenced by position or rankings by commercial marketers and vendors. Placements on these websites or listings are sometimes paid placements.
Inform and educate yourself to recognize and understand that “Best” really means “Competitive” opportunities that will serve and assist you well over the long-term not just the lowest advertised interest rate.

In Conclusion:

Choosing the right lender and loan to finance your education is an important decision and may save you significant amounts of money The questions, tips and insights offered above are all important when choosing a lender. No amount of incentives is worth it if you cannot effectively communicate and work with your lender and servicer. Doing your homework on choosing the right lender and loan for you will save you money, time, frustration and stress when it comes time to move on in your career and repay your loan.

Knowledgeable MEDebt Solutions consolidation counselors have served AMSA members since 2001, providing no pressure, accurate and trusted information to aid physicians-in-training in making an informed decision about the management of your loans. For more information please call to speak with a knowledgeable MEDebt Solutions consolidation counselors or visit our website at www.MEDebtSolutions.com or email info@medebtsolutions.com. MEDebt Solutions consolidation counselors at ASLCC can be contacted by calling toll-free 1-800-741-4704. Be sure to reference AMSA.

For more information about MEDebt Solutions selection of federal, private and international loans please visit our website at www.MEDebtSolutions.com or email info@medebtsolutions.com. You are also invited to contact us directly at 1-866-EAS-GROUP.

The content of this publication are proprietary and are for informational use only and are subject to change without notice. MEDebt Solutions, EAS Group, LLC, any program provider/servicer nor the authors/editors assume any responsibility or liability for any error, omission or inaccuracy.

October 2007