Effectively Utilizing Private Loans to Support Recruitment and Retention
John W. Dysart
The Dysart Group, Inc.
Over the past year, much has been published in the media about the student loan industry. Specifically, there have been many headlines over the course of the year that discuss how private student loans, funds provided by educational lenders, have grown into a $17 billion a year industry and how lenders are directly communicating with consumers to secure educational funds to pay for college because of the decline in subsidies for Federal loans. Further, the costs for higher education continue to rise and federal and state support in the form of financial aid has simply not kept pace. The gap between what traditional financial aid covers, and what college costs increases every year. This is particularly true at private colleges and universities. Students and families are increasingly turning to private loans to fill the gap.
Colleges and universities must still provide students educational financing options so that they can enroll for classes for the first semester and thereafter. As college financial aid offices start to leverage private loans to bridge the gap between traditional financial aid and the cost of higher education, it is important for college administrators to look at such private loan products and consider how these products support the areas of recruitment and retention.
When you think about loan products, accessibility and flexibility are critical factors because as a school, you will need a loan product that will be available to a high percentage of your students. Private loans may not only enhance your existing packaging strategies, but also be used for study-abroad programs, adult programs, on-line programs or to entice ?stop-outs? to pay back balances and reenroll.
Thus, how do you know if you have an accessible and flexible product? Here are some quantitative questions to consider asking as you examine the accessibility and flexibility of the product you are evaluating:
Question: What are the eligibility requirements that a borrower must meet to be approved for this private loan?
This question is essential in determining whether or not you have a flexible loan product that is intended to be accessible. It is important to understand that lenders use eligibility requirements as a way to mitigate default risks. However, the more requirements that the student must meet; the less accessible the product will be. As a result, the ability of a student to obtain a gap finance tool to enroll for the semester is affected. Examples of requirements include but are not limited to: income or residency requirements, a certain number of lines of established credit or no derogatory credit which would include: bankruptcy, charge-offs, or late payments. As you consider the lender requirements, think about your students and whether or not they would pass such requirements.
Question: What is the FICO range for the private loan product?
Understanding the FICO range allows you to determine whether a product is intended to be accessible to a broader range of students. It will help you determine if the product might be limited to a small segment of borrowers with ?great? credit or if it is an accessible product that is available to a larger segment of borrowers along the FICO band (0 to 850). The median FICO of the average borrower at the national level is approximately 723. Many traditional, commercial private loan products will be available to individuals in 660-723 range; but they will not lend to individuals with sub-prime credit. Sub-prime credit is credit that is south of 659. If a lender does have a product that is available to borrowers with sub-prime credit, the student or family will probably pay a price (greater interest rate and or fees) for their less than stellar credit. However, in most cases, a private educational loan is still a better option than more expensive methods, particularly credit cards. Strategically, it is to your advantage to leverage a product that is the most accessible to the most students.
Question: How easy is it to apply for the product?
Ease of application process by website or by telephone is critical because you want students and families to receive a decision about whether or not they can count on the loan(s). More importantly, if the student is approved, you want an application process that is capable of providing the specific terms of the loan (interest rate, APR, fees) immediately upon approval. If the student can receive an online loan decision quickly, he/she will be more likely to make his/her ?educational purchase? (i.e. pay for tuition, dormitory, books, etc?).
In the upcoming year we are likely to see a large increase in direct to consumer (DTC) marketing by lenders. Increasingly your prospective students and families are going to look to your institution for guidance on private loan options. It is important for the school?s financial aid office to adequately assess the best options available to bridge any funding gaps that your students may have. All in all, as more private loan products are introduced in the financial aid market place, it will be critical for administrators to look for products that promote accessibility and flexibility, as these attributes are essential for helping to enroll and retain students.