Financing Your MBA

With interest rates at historic lows, has anyone going to school this fall looked into financing options? I know there are the Stafford loans at 6.80% fixed, has anyone found any better deals? Where are private student loan rates coming in these days?

For borrowers with excellent credit (750+ FICO), I am currently hearing of "private" (school-certified) loans at Prime+100bps or around 1mLIBOR+400bps. But this will vary by the school you're attending and your credit history.

If these rates stay in effect until May or July 2008, I personally intend to apply for a 1mLIBOR indexed loan over the GradPlus loans which are, as we know, 8.50% fixed but also include 3.00% upfront in origination fees and a 1.00% federal default fee. The "private" loans, for borrowers with excellent credit, tack on 0% in fees. I am led to believe a LIBOR indexed loan is preferable to a Prime indexed loan because the spread between the two has been increasing over the years, in 1mLIBOR's favour.

This is just based on my (limited) research so far. YMMV. I'd love to hear if anyone else has found other information worth sharing.

Solaris,

Where are you getting this info from? I'm really curious about these prime+100bps loans. I've got a great credit rating and I'm thinking I should be able to do better than 8.5% considering the current prime rate.

Do you just go through your school?

RF

refurb, that seems to be rate advertised on Citi's NYU Stern microsite for their Citiassist loans. The LIBOR rates are what Sallie Mae is offering to students with a "higher tier" credit rating. Both loans come out to be in the 4.25% to 4.40% range as of today.

Do note however that I have not actually applied for either loan yet. So the rate you get might be different. I'm just trying to get a sense of what's out there.

Oh wow. Solaris - you are very knowledgeable in this area.
Thanks for your very detailed answers.

May I ask, do you do this for living? I am curious.

if you're offered libor + 4.00% vs, prime + 1.00%, the prime option should turn out cheaper over the course of the loan. 1month libor is at 0.39%, which makes the libor option 4.39%. prime is at 3.25%, which makes the prime option come out to 4.25%.

getmeouttahere, that's true these days, but I'm told historically the spread between 1mLIBOR and Prime has diverged in 1mLIBOR's favour. So despite the 14bps differential, LIBOR might be a better bet for a loan that will be paid over the next 3-4 years.

I've been trying to download historical Prime and 1mLIBOR and 3mLIBOR rates from Bloomberg and chart them to see if that really is true. Haven't had a chance to do so yet.



BearStearner, I'm just one of your regular marketing/business development types. Nothing to do with credit whatsoever.

Solaris,

Thanks for the info! I've never taken student loans out before, so this is all really new to me. I've seen rates that were close to 8% and I thought that was pretty high considering what interest rates are these days.

Something in the range of 4% would make a huge difference over the lifetime of a loan.

RF

Hold your horses. The Prime Rate moves in tandem with the Fed Funds rate. As recently as January 2001, the Prime Rate was 9.00%, compared to 3.25% today.

The private education loans (Citiassist, Sallie Mae signature etc.) we are discussing are variable rate, and the interest rate on your loan will reset each time the index changes. So if a Prime+100bps loan is @ 4.25% right now, there is no guarantee it will not change say 6 months from now. Or sooner.

When taking out private education loans instead of the federal GradPlus loans, we are essentially making a bet here that the underlying interest rates on will not spike too much in the next 2-3 years. If you are uncomfortable with this interest rate risk, you should take out the GradPlus loan which offers a fixed 8.5% rate no matter what.

Bear in mind you can also take out $41,000 (over two years) worth of federal loans through the Stafford program @ 6.8% fixed. I plan to take the full amount in Stafford loans before considering "private" education loans.



By the way, I just quickly ran the spreads between the 1mLIBOR and Prime rates over the past 20 years, and the average spread between them has been 270bps. However, since the 1mLIBOR rate adjusts far more frequently, the 30bps difference between a Prime+100bps loan and a 1mLIBOR+400 one is minimal at best.

I will throw in there that private loans don't always offer the bells and whistles of the federal dollars. Flexibility with repayment (income-sensitive, graduated, forbearance, extended payment terms) is mainly what i am thinking of. Private student lenders vary quite a bit, while all federal lenders follow the exact same rules.

Ahh!!! No locked in rate. I see!

Ok, the Stafford is looking much better at this point.

It is a gamble, but I would a relatively safe one if you feel you can pay off the loans in a short period of time?

For example, if you finance $41K of the $90K of tuition by Stafford, then the remainder ($49K) at 4.X% variable rate, the prime would have to go up almost 300 bps before you matched the rate on a Stafford, right?

If you feel you can pay off the loans in 5 years or less (at least the non-Stafford loans), even if the prime rate went up 600 bps, the overall impact would be relatively small.

Considering the state of the credit market/economy I would guess that rates will be relatively low for the next few years.

Or am I missing something here?

RF

That's a BIG gamble. I know there is a lot of chatter about how much money the Fed has printed over the last few months and that we may have a huge risk of inflation when we finally pull out of this recession. To combat that the Fed may have to raise rates, maybe 500+ bps. While I am not saying that is a definite, it would be a big gamble taking a floating rate loan that could end up at 9.00% or even higher.

Loan Crisis Hits the MBA World
With big lenders requiring co-signers, international students are finding that money is tight. For many, B-school dreams may be over before they start

https://www.businessweek.com/bschools/co ... =rss_daily

Yes, this is true. It is just not possible to get a co-signer. And not all schools have equal empathy towards the situation..

BTW, I do not think the international student population will reduce alarmingly , since anyway lion's share of the international students in TOP US B-schools have credit history ( and in many cases Green Card) in US or come from the creme-de-la-creme segment of an international country. There will be reduction of international student of course but the first two groups will fill that shortfall.

Do they count green card holder as international student though?

I agree with you. The numbers won't go dip at all.
I've been hanging out with internationals since I was an undergrad..and..I notice a lot of creme de la creme internationals for undergrad. I'm not saying all of them are, but a big portion of them usually would be successful regardless of bschool.
For school, I believe they don't even need any kind of loan. And these people have good 'why mba' stories too (because they have something running already that they can take further if they have that mba) plus loaded recommendations.

I recall reading, some time ago, that one should try to postpone any financial gifts when attempting to secure Federal aid for B-School. When I receive my Financial Aid package, will the amount I have in my 401(k) and/or savings account affect how much the Federal government would be willing to loan me? I recall hearing that one could borrow up to the full budgeted yearly amount from the Fed, but I'm guessing the amount of money in my accounts would determine how much Uncle Sam gives me in subsidized loans.

they do not count qualified retirement accounts (401k, IRA) or the value of your home. They will look at non-qualified accounts, such as savings, money market, stocks, etc.

The subsidized/unsubsidized part is determined by need.