How Students Use Credit and What You Need to Know. Deb Gossman College Ave Student Loans

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1 How Students Use Credit and What You Need to Know Deb Gossman College Ave Student Loans

2 Agenda Private credit within the student loan ecosystem & compared to other consumer assets Credit Reports & Credit Scores Tools available for borrowers, to help them better understand their credit and debt obligation Final Thoughts 2019 ILASFAA Annual Conference 2

3 Private Credit Within The Student Loan Eco-system & Compared to Other Consumer Assets 2019 ILASFAA Annual Conference 3

4 Federal Loans vs Private Student Loans Federal student loans and federal parent loans: These loans are funded by the federal government. Private student loans: These loans are nonfederal loans, made by a lender such as a bank, credit union, state agency, or a school ILASFAA Annual Conference 4

5 Direct Subsidized Loans - undergraduates who demonstrate financial need Direct Unsubsidized Loans - undergraduate, graduate, and professional students, student does not have to demonstrate financial Direct PLUS Loans - graduate or professional students and parents of dependent undergraduate students. Direct Consolidation Loans combine all federal student loans into a single loan with a single loan servicer. Loan Terms Interest rates set by federal government Annual loan amount limits Lifetime loan aggregate limits Not credit based Direct PLUS Loans: Must not have an adverse credit history. The maximum loan amount is the cost of attendance minus any other financial aid received 2019 ILASFAA Annual Conference 5

6 Undergraduate Loans - undergraduates who have a gap financing need Graduate Loans - graduate students with gap financing needs. Some lenders have specific products e.g. Med Loans, Dental Loans etc. Parent Loans - generally parent or sponsor borrowers on for the benefit of a student.. Consolidation Loans- may combine federal & private or just private loans into a single loan with a single loan servicer. Bar Study Loan gap loan for students preparing for bar exam Residency & Relocation Loan gap loan for medical students setting up practice post graduation Credit based Loan terms Interest rates based on lender underwriting Better credit = better rates Annual loan amount limits Lifetime loan aggregate limits Credit based The maximum loan amount is the cost of attendance minus any other financial aid received 2019 ILASFAA Annual Conference 6

7 Private student loans represent a small portion of the pie Private loans represent 9% of new originations annually Private loans represent 8% of student loan outstanding 2019 ILASFAA Annual Conference 7

8 Federal vs. private student loans a world of difference Federal Private Objective Provides access Meet a consumer financial need Screening (Dependent) Parent Parent & Student Underwritten No Yes Obligation Student Parent & Student Originator ED Lender Investment Treasury Private Servicer Multiple Contractors Usually lender Collector Outsourced Usually lender Bankruptcy discharge No No Consumer Reporting Exposure 2019 ILASFAA Annual Conference 8

9 Student loans vs. other consumer assets Examples Auto Loan Mortgage Secured Loan Unsecured Loan Student Loan Credit Card Personal Loan Federal/Private Loan Type Asset backed General purpose Need-based/Consumer need Underwriting Consumer credit reports combined with asset valuation Risk Mitigants Asset collateral protects the loan Down payment for more security Consumer credit report centric Limit amount borrowed Limit repayment period Private-Consumer credit report centric Little to no risk mitigants Extended loan commitment Long repayment term 2019 ILASFAA Annual Conference 9

10 What do students know about credit? 2019 ILASFAA Annual Conference 10

11 Credit Reports & Credit Scores 2019 ILASFAA Annual Conference 11

12 Every student should understand what a credit report is Your personal credit report includes a record of your financial accounts and obligations and the identification information associated with them This report is sometimes called a credit file or a credit history Credit reporting companies collect and organize data about your credit history from your creditor's and public records 2019 ILASFAA Annual Conference 12

13 Every student should understand why a credit report is important Why a credit report is important Lenders use credit reports and credit scores to gauge the likelihood that you will pay back a loan Reports are also used in other non-lending situations employment checks, apartment rental applications, utilities, cellular phones, etc. Your credit report serves as your financial references to companies with whom you want to do business A strong credit history enables you to obtain a credit card, home and auto loans and other valuable credit services, and can affect the amount that you pay for those services 2019 ILASFAA Annual Conference 13

14 Every student should know what s included in a credit report Identifying information Account information Public record information Inquiries Dispute instructions Credit report 2019 ILASFAA Annual Conference 14

15 Every student should know what s included in a credit report 1. Identifying Information Your name and any name you may have used in the past in connection with a credit account, including nicknames Current and former addresses Birth date Social Security number Phone numbers 2. Account Information Current and historical credit accounts, including the type of account (mortgage, installment, revolving, etc.) The credit limit or amount Account balance Account payment history & payment status The date the account was opened and closed The name of the creditor 2019 ILASFAA Annual Conference 15

16 Every student should know what s included in a credit report 3. Public Record Information Liens Foreclosures Bankruptcies Civil suits and judgments A credit report may include information on overdue child support provided by a state or local child support agency or verified by any local, state, or federal government agency. 4. Inquiries Companies that have accessed your credit report. 5. Dispute instructions 2019 ILASFAA Annual Conference 16

17 How long is information kept on a report? How long is information kept on a report? How long is information kept on a report? 2019 ILASFAA Annual Conference 17

18 Every student should know what a credit score is Valuable risk management tool used to determine an individual s risk of defaulting on a loan Many different models, with many different scales available from many different sources There is no One Score Credit scores are not part of a credit report All 3 credit agencies develop their own credit score 2019 ILASFAA Annual Conference 18

19 What is a FICO score? A consumer credit scoring model developed in the 80 s FICO comes from the company s original name, the Fair Isaac Corporation Uses information provided by one of the three major credit reporting agencies Equifax, Experian or TransUnion. FICO itself is not a credit reporting agency ILASFAA Annual Conference 19

20 What is a VantageScore? A consumer credit-scoring model developed in 2006, through a joint venture of the three major credit bureaus. Managed and maintained by an independent company, VantageScore Solutions, LLC, jointly owned by the three bureaus FICO s market dominance has been challenged by this newcomer VantageScore uses similar scoring methods to FICO but with slightly different results ILASFAA Annual Conference 20

21 FICO vs. VantageScore Length of History FICO requires at least six months of credit history and at least one account reported to a bureau within the last six months. VantageScore only requires one month of history and one account reported within the past two years. Late Payments FICO treats all late payments the same VantageScore judges them differently it penalizes late mortgage payments more harshly than other types of credit. Credit Inquiries FICO uses a 45-day span to deduplicate your credit inquiries. FICO considers only mortgages, auto loans, and student loans. VantageScore limits its focus to only a 14-day range. VantageScore also looks at multiple hard inquiries for all types of credit, including credit cards ILASFAA Annual Conference 21

22 Where can you get your FICO or VantageScore? FICO Consumers can get their generic or classic FICO score from Experian, TransUnion, and Equifax by going to the website. VantageScore TransUnion and Experian also offer VantageScores to consumers for a fee through their websites. Consumers can get their VantageScores from free credit report websites bsites 2019 ILASFAA Annual Conference 22

23 Every student should know what factors influence a credit score VantageScore 3.0 credit score [CELLRANGE], [VALUE] Available credit, 3% [CELLRANGE], [VALUE] [CELLRANGE], [VALUE] [CELLRANGE], [VALUE] [CELLRANGE], [VALUE] 2019 ILASFAA Annual Conference 23

24 What is an UltraFICO Score? Being introduced in 2019 Biggest shift in 3 decades for FICO Rather than relying primarily on a consumer s credit history, FICO will factor in how consumer s manage the cash in their checking, savings and money-market accounts. Meant to boost consumers odds for approval on credit cards and personal loans. Will look at a person s current checking account balance, length of checking history, transaction frequency and overdraw history ILASFAA Annual Conference 24

25 Credit score ranges Super Prime Prime Near Prime Subprime Deep subprime Source: Experian Research State of Credit: ILASFAA Annual Conference 25

26 2017 Vantage Score by State Highest Credit Scores: North Dakota South Dakota Nebraska Minnesota Wisconsin Iowa Massachusetts Vermont New Hampshire Lowest Credit Scores Nevada Texas Oklahoma Arkansas Louisiana Mississippi Alabama Georgia South Carolina West Virginia Source: Experian 2017 State of Credit ILASFAA Annual Conference 26

27 Source: Experian Research State of Credit: ILASFAA Annual Conference 27

28 Tools Available for Borrowers to Help Them Understand their Credit & Debt Obligation 2019 ILASFAA Annual Conference 28

29 Education resources on the web Free annual FACT Act credit report Access to free report from each of the three credit reporting companies Experian Ask Experian advice column, sample consumer report, frequently asked questions Credit trends and information to inspire consumers to use credit wisely Electronic versions of published materials, sample credit report, videos, PowerPoint presentations with talk notes and more zzzz zzzz zzzz zzzz zzzz zzzz zzzz zzzz zzzz zzzz zz 2019 ILASFAA Annual Conference 29

30 Education resources on the web Equifax Information on Credit Reports, Credit Scores, Identify Theft. Relevant articles about a variety of topics are presented for the consumer Transunion Select Credit Education. Information on Credit Reports, Credit Scores, Identify Theft, Credit Monitoring, Debt and Money Management, Credit Bureaus, Annual Credit Report, Mortgage, Credit Cards, and Frequently Asked Questions 2019 ILASFAA Annual Conference 30

31 Where to get your VantageScore 2019 ILASFAA Annual Conference 31

32 Final Thoughts 2019 ILASFAA Annual Conference 32

33 Start the journey wisely Credit is not something that will be automatically ready for you when you need it. It has to be built, carefully and thoughtfully over time. Understand that credit is a privilege. With proper credit knowledge and demonstrating good credit behaviors, you will reap the rewards of a stellar credit history and score ILASFAA Annual Conference 33

34 Student loan misconceptions remedied by high standards Simple Make sure the loan application is not complex to complete and understand Clear Disclosures are clear I understand the obligation o The amount I must repay-principal and interest o For how many years o My interest rate o Are there any fees? o Prepay without penalty Personalized The loan fits my unique needs and situation I am an informed consumer! 2019 ILASFAA Annual Conference 34

35 Final thoughts: 6 easy steps to help your students & families 1. Educate yourself done! 2. Remember that credit is starting for your students at the doorstep of your institution 3. Have conversations about the impact of debt on your students future 4. Discuss the benefits of making monthly payments while in school 5. Sample Credit Report use a sample credit report to talk to your students about what s on it. See: 6. Use the tools made available to you through Jump Start, credit bureaus, etc ILASFAA Annual Conference 35

36 Thank You Deb Gossman College Ave Student Loans Head of Campus Development-Central Region ILASFAA Annual Conference 36