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As private lenders including credit unions offer more options, the landscape is more confusing for students desperate to figure out how to pay for their education.
Americans now owe $1.3 trillion in student debt -- an amount that is swelling and represents the fastest-growing area of consumer debt, according to economists.
The average debt of Pennsylvania students -- including those in private and public colleges -- is more than $32,000 after four years.
More and more, those students are turning to private lenders to help pay for school.
One source is Credit Union Student Choice, which handles the applications, processing and servicing of student loans issued by 245 members, including 39 in Pennsylvania.
Founded by 10 credit unions in 2008, the network in seven years has connected 70,000 college students with $1.7 billion in loans.
Even as they add borrowers, private lenders acknowledge that students ought to lean first on federal loans.
Mike Weber, at Credit Union Student Choice, said their loans are "meant to fill the gap" after students borrow as much as they can from federal programs.
First-year students can only borrow $5,500 a year through the federal student loan program. Upper-class students can borrow $7,500 a year.
The College Board estimates that a four-year degree at a public university costs an average of $76,000 at a public school.
At a private school, it is $170,000.
"Credit unions needed an option because members kept coming in and asking for student loans," Weber said.
The credit union loans charge about 6 percent interest rates, he said.
Private loans still represent a fraction of student debt. The federal government program accounts for $100 billion in loans a year -- the bulk of borrowing by college students.
Sallie Mae -- the nations largest private student loan lender -- estimates that private banks, including credit unions, loaned $8 billion to students last year.
College affordability and long-term effects of student debt are getting more attention, including in the race for president. Candidates in both parties suggest they will tackle the problem.
One advocacy group, the Young Invincibles, reports that most students take on debt without understanding the difference between government and private loans. Most rely on college financial aid offices for advice, the group said.
The Young Invincibles lobbies to improve the economy for young Americans. Among its recommendations, the group proposes simplifying the student loan process.
Students may leave grant aid on the table, it says, take out unnecessary loans or lean too heavily on private lenders.
Research by the Institute on College Access and Success has reached the same conclusions.
About half of students who take out private loans could have relied more heavily on federal loans, its analysis found.
And one in five students who took out private loans didnt borrow from the federal government at all, the group says.
That represents missed opportunity for some students, if only because government loans generally have lower interest rates.
Federal loans charge 4.29 percent. The Institute on College Access points to variable rates advertised for private loans that exceeded 13 percent.
Sallie Mae advertises fixed rates as low as 6.4 percent and variable rates from 3.17 percent to 9.37 percent.
Rates arent the only consideration. Government loans also offer more flexible terms, according to consumer advocates.
Its easier for graduates to enroll into income-based repayment plans with government loans, said Nick Clements, founder of MagnifyMoney.com, a consumer finance website.
These plans limit the debt payments and cap the overall repayment term at 20 years. If the graduates debt isnt paid off after two decades, the balance is forgiven.
Sallie Mae was created as a government-sponsored enterprise in the 1970s. It was privatized in 2004 and now estimates that it has 54 percent of the private student loan market.
In reports to investors, Sallie Mae said its loans increased 7 percent last year. So far in 2015, its loans are up 8 percent.
But its getting more competition as other lenders enter the market.
Mike Wishnow, a spokesman for the Pennsylvania Association of Credit Unions, estimated about half of almost 500 credit unions in the state now offer student loans to their members.
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Tribune News Service
Bathinda, September 25Under the Pradhan Mantri Mudra Bank Yojana, various banks of the district held a mega camp in the city today wherein 963 beneficiaries were sanctioned loans Rs 4.53 crore in the presence of Chief Parliamentary Secretary (CPS) Sarup Chand Singla. Sarup Chand Singla said Prime Minister Narendra Modi had envisioned setting up of the Mudra Bank for small and medium traders, which had proved to be a boon for them. He thanked the bank officers and employees for launching the programme in here today. The CPS said the Prime Minister was aware of the problems at the grass-root level. Taking a revolutionary step, he launched major schemes in a short span of over a year, which are very helpful to the poor, he added. Through the Jan Dhan Yojana, everyone in the country got his/her bank account opened. Earlier, the poor had no relation with the banks. The poor ware dependent on rich for loans at exorbitant rates of interest. He said youngsters got training in various courses but they were unable to start their own work as they didnt have enough funds. At the Mudra Bank, beneficiaries can avail loans up to Rs 10 lakh without any security. ADC (General) Sumit Jarangal said people could get loans without any guarantee. Under the scheme, loans are made available at all nationalised banks at less than 12 per cent yearly rate of interest, he added. Bank officials said under the Shishu Yojana, Rs 50,000, under the Kishore Yojana Rs 50,000 to Rs 5 lakh and under the Tarun Yojana a loan of Rs 5 lakh to Rs 10 lakh was provided. The loans are meant for small and medium traders as well as the establishments like boutique and beauty parlours run by women. BJP city president Mohit Gupta, Akali Dal city president Sudhir Bansal, Senior Deputy Mayor Tarsem Goyal, SDM Anmol Singh Dhaliwal, State Bank of Patiala DGM NK Dhaliwal and Punjab National Bank DGM Charanjit Singh were present on the occasion.
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Every time Im able to put a little money in savings, something happens and I end up having to deplete my savings. How do I avoid that? I have no credit card debt, but am drowning in student loan debt.
Suze Orman: The most dangerous debt you can ever have is student loan debt because student loan debt is not dischargeable in bankruptcy. So I want you to change your attitude -- stop feeling like youre drowning in student loan debt and start feeling like youre swimming in the future of your life...and that your student loan debt allowed you to get there. Change your attitude and youll see your financial life change, too.
I cannot pay my tuition and living expenses. Is there any way to lower or work off college debt? I am 58 years old.
You have to understand that student loan debt does not go away. They have the legal authority to garnish your social security check. So, you have got to get the word cant out of your vocabulary. You might want to think about getting a job at a non-profit organization because if you do, you then can pay back your student loan debt under the IBR method and after 10 years, its totally forgiven. Then, at 68, if you want, you can claim full social security. No student loan payment + extra income from social security should help you a lot!
How do you pay Parent Plus loans off when you cant afford the payments?
Im sorry to say to you -- you shouldve thought about that before you took a parent plus loan. Because you are on the hook for those loans and theres absolutely no way for you to get around them. if you really cant afford to make payments on them, you are to ask your child who you took these loans out for to help you. They owe it to you to help pay for their college education. So, go ask them right now!
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LONDON, Sept 22 The erosion of financial protections has spread throughout Europes leveraged loan market, affecting lower to mid-market deals as well as larger 1 billion euro-plus ($1.12 billion) transactions, as sponsors seek greater flexibility to grow companies and protect their equity in more difficult times.
The European loan market has largely accepted covenant-lite loans, having initially shunned the structures made popular in the US.
European lenders were increasingly exposed to them with the emergence of a greater number of cross-border transactions in 2013, before an 818 million euro loan backing the buyout of French veterinary pharmaceutical firm Ceva Sante Animale became Europes first pure covenant-lite loan in 2014.
A European covenant-lite loan sees the removal of maintenance covenants but usually has a springing leveraged covenant in the revolving credit facility.
Even if a loan is not covenant-lite, it is increasingly rare to have a European loan with all four traditional maintenance covenants. As such, covenant-loose loans have grown in popularity and contain just one maintenance covenant, sometimes two - most typically a leveraged ratio test.
Only 33 percent of loans year-to-date had a full maintenance covenant package, compared with 88 percent in 2013. In its place, covenant-lite and covenant-loose loans account for 35 percent and 28 percent of 2015 deals, compared with 11 percent and 3 percent in 2013, respectively, according to data from leveraged finance data firm DebtXplained.
Covenant-lite has been somewhat more prevalent in Europe recently. That is an evolution of the market: not every deal is automatically covenant-lite, a senior sponsor said.
Investors have become increasingly comfortable with covenant-lite structures on large, liquid jumbo loans, especially as most of them also invest in high-yield bonds which have similar incurrence-based covenants as opposed to maintenance covenants.
Around 63 percent of loans larger than 1 billion euros have been covenant-lite in 2015, compared with 50 percent in 2014, the data shows.
This has opened the gateway for sponsors to demand looser structures on smaller deals, with 77 percent of sub-250 million euro loans covenant-loose in 2015, compared with 47 percent in 2014.
The erosion of maintenance covenants has been particularly useful for sponsors with a buy-and-build strategy, gifting them more flexibility to make bolt-on acquisitions and raise incremental debt.
Covenant-lite can reduce admin around deals, which is beneficial. The structures are probably more suitable in a buy-and-build scenario using the flexibility for bolt-on acquisitions, financed with incremental facilities, the sponsor said. The real benefit of a covenant-lite loan is where it is akin to the benefits of a bond deal. A sponsor still has to be comfortable that investors will continue to support a growing business.
The erosion of covenants has also helped sponsors to protect their equity in a deal as companies are no longer subject to a series of regular financial tests. This is particularly useful to cyclical businesses.
Covenant-lite is having an effect on the buying pattern of distressed investors. Distressed investors would previously start buying into a deal when a company got close to breaching covenants and credit funds and CLO investors sold risk. Without any covenants to breach, investors are less likely to pull the trigger and sell at such an early stage.
In some cases, distressed investors will only be able to buy into a business once it runs out of cash.
A business may not be bad but going through a bad market time. A sponsor can obviously improve their protection in that scenario by having incurrence tests rather than a financial test related to underlying performance, the sponsor said.
Distressed trading desks are noticing a recent decline in the amount of distressed LBO paper, with some desks stating the majority of activity comes from more traditional corporate and special situations, such as Spanish renewable energy, shipping loans, busted corporates or liquidations.
Distressed investors have been far more active in buying loans quoted at low levels on Europes secondary loan market, in the hope of an upswing in the business and the value of the paper, as opposed to buying with a loan-to-own strategy, a distressed trader said.
It is a different game for distressed investors when there are no covenants as they might only be able to get in once a company runs out of money, due to a lack of clear warnings like covenant breaches, an investor said. ($1 = 0.8959 euros) (Editing by Christopher Mangham)
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By Kelly Field
Democratic lawmakers are joining with House Republicans in a last-ditch effort to save the decades-old Federal Perkins Loan Program, which is set to expire next week.
On Thursday a bipartisan group in the House of Representatives introduced a bill that would continue the program for one year. To pay for the extension, the measure would limit the number of years that current recipients may receive the loans.
The House is expected to pass the measure next week, but its unclear whether the Senate will advance it for President Obamas signature. On Thursday an aide to Sen. Lamar Alexander of Tennessee, the Republican chairman of the education committee, said that it makes little sense for Congress to extend the Perkins Loan Program, which is outdated and unnecessary, would come at a significant cost to taxpayers, and provides little benefit to students.
Students pay higher interest rates than on other federal student loans and cant use income-based repayment to reduce their Perkins Loan payments after graduation, the aide continued.
Some 1,500 colleges participate in Perkins, the nations longest-running student-loan program. In the 2013-14 academic year, the program lent more than $1.2 billion to 539,000 new and returning students.
The Perkins program operates through a risk-sharing agreement between the federal government and colleges. For every dollar that Congress puts in, colleges are required to contribute 33 cents of their own money. When borrowers repay their loans, the money goes into a revolving fund that colleges use to make new loans.
This is hardly the first time the Perkins program has been under threat. For years, lawmakers and presidents in both parties have tried to kill or reform it, but none has succeeded. Still, with congressional Republicans focused on cutting costs and simplifying student aid, proponents of the program are worried that this time it might really die.
In an effort to save the program, Perkins supporters on Capitol Hill and college campuses have been circulating a pair of resolutions calling for the programs continuation and a Change.org petition warning that the program is in peril. On Thursday a resolution in the House had 56 cosponsors, while the Change.org petition had more than 18,000 signatures; a brand-new Senate companion had four cosponsors, including two Republicans.
Under the House bill, students who now receive Perkins Loans would be eligible to receive disbursements only through March 2018. That cutoff would reduce the cost of the program, allowing new students to receive the loans next year. But lawmakers hope that no students will ultimately suffer the cut; their goal is to remake and continue the Perkins program as part of the forthcoming reauthorization of the Higher Education Act.
The one-year extension, said Cynthia A. Littlefield, vice president for federal relations at the Association of Jesuit Colleges and Universities, would buy us some time to talk about the value of this important program.
With a few days left to go, she said, its down to the wire.