Looking at lending: want to make money and serve your students better? Some colleges are doing this by underwriting loans to graduate students
August 31st, 2007 by monies“We were frustrated because financial industry consolidation and lenders selling their loans to
Secondary markets consider federal graduate student loans good investments because the borrowers are expected to enter high income-generating fields, and because the loan amounts are higher, on average, than for undergraduates.
Undergraduate loans are less appealing for direct school lenders because of the federal loan program’s restrictions. “The school can act as lender as long as it doesn’t lend to more than 50 percent of its undergrads, and a commercial lender has turned the student down,” Krause says. “But these days everyone is making loans. The Federal Family Education Loan Program includes government guarantees, so there are no turndowns.” With the graduate student population, such restrictions do not apply.
The University of Oklahoma began making direct loans to its graduate students in 1996. Since OU is a public institution, a line of credit wasn’t an option, so the school turned to the Lew Wentz Foundation, a $14 million private group that exists to make loans to students, so the federal direct school lending program fit perfectly.
Matt Hamilton, OU’s associate vice president for admissions, records and financial aid, sought proposals to outsource the loan servicing involved: origination, funding, service and sales agreement. “I was looking to accept one proposal,” he says, “but it could involve several entities.”
OU accepted the proposal from Boatman’s Bank (now merged into Bank of America) as the funder with Sallie Mae as the originator, servicer and secondary market buyer. Under the agreement, Bank of America and Oklahoma Student Loan Authority now provide the funding/service/secondary market package. “It was a good deal for the students, and earned a better premium for us,” Hamilton says.
Western University of Health Sciences is in its second year of the program. “We’ve gained much by becoming a lender,” says Otto Reyer, director of financial aid. “We eliminated the origination fee for our graduate students. Normally, they’d pay 3 percent of the loan value. Now when our students borrow $1,000, they get $1,000, not $970.”
WUHS went with Student Loan Funding, based in Cincinnati (later bought by Sallie Mae), USA Group as servicer and Firstar Bank of Cincinnati for interim financing.
St. Mary’s borrows the money it lends under a specially negotiated line of credit with Bank of America. The credit line borrowings are paid off when the loans are sold to the secondary market source (currently Sallie Mae), which pays a premium for the assets.
Typically loans are made in two disbursements that pay for fall and spring tuition, and St. Mary’s sells its loans each spring after the second disbursement. Selling to the secondary market on an annual basis is typical at most schools that are Federal Family Education Loan Program lenders.
“With a graduate student loan volume of, say, $10 million, most schools could be making 3 percent to 4 percent, and generating upwards of $300,000 to $400,000 in annual revenue,” says Krause.
The government also pays schools a special allowance while they’re holding these loans, but the line of credit is an offsetting cost. “There’s a slight variance between the two figures from year to year,” he says, “but over time we’ve found that they tend to cancel each other out.”
Author: Judith Harkham Semas
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