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Loan Analyzer

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This calculator has been superseded by the new Loan Discount Analzyer calculator.

Students and their families often have trouble evaluating student loans because of the many ways in which they can differ. Common differences include loan fees, interest rates, repayment terms, interest capitalization and prompt payment incentives. It isn't entirely obvious that a loan with a 4% fee and a 9% interest rate is worse than a loan with a 5% fee and an 8% interest rate. (A good rule of thumb is that an extra 1% in the interest rate costs more than a 1 point increase in the fees.) Likewise, loans with different repayment terms are hard to compare, because increasing the loan term actually decreases the APR, even though the borrower will pay more interest over the lifetime of the loan.

When banks evaluate a loan, they calculate the loan's Net Present Value (NPV). The NPV measures how much money you'd have to have right now, earning a specified rate of return (called the discount rate), so that this pool of money could be used to make the payments on the loan with no money left over at the end. But calculating the NPV is beyond the scope of this calculator, so we calculate an approximation that is related to the NPV.

The purpose of this calculator is to boil down a loan's characteristics into a single number that we're calling the loan's K-Factor. The K-Factor analysis isn't perfect, because it operates under assumptions that interfere with some prompt payment plans, but it does seem to be a reasonable first attempt at comparing the various educational loans from a borrower perspective.

To arrive at the K-Factor for a loan, this calculator assumes that the borrower wants to receive $10,000 for his or her education after all fees have been deducted and wants to make payments of $150 a month, regardless of the other characteristics of the loan. The K-Factor is the number of payments required to repay the loan under these assumptions. The idea is to hold constant the factors that really matter to the borrower - the amount received up front and the amount paid per month - and see how the loans vary. The lower a loan's K-Factor, the better the loan.

The K-Factor tries to convert a complicated loan into one that can be thought of as having known cash flows with a known duration. The K-APR is essentially the APR calculated for this converted loan. The NPV of payments using the K-APR as the discount rate will approximately equal the net proceeds of the loan. As such, the K-Factor and K-APR should imply the same loan rankings.

This calculator is not intended for evaluating credit card rates. Even though the K-APR for loans with capitalized interest might seem to be in the same ballpark as the interest rate on some credit cards, students should not conclude that credit cards are therefore cheaper. Capitalizing interest does explode the total repayment, but the results should be compared with loans that capitalize the interest, not credit cards. If a student must compare the results with credit card rates, treat the student loan as though it were subsidized for the purpose of the comparison.

The cost of the loan is but one of several factors a student should consider while selecting the loan. Other factors include:

  • The length of the repayment period and the repayment options.
  • Whether there is an in-school deferment period (e.g., the loan either subsidizes or capitalizes the interest) or requires immediate repayment.
  • Whether the interest rate is variable or fixed.
  • Quality of service.
  • Value-added services.
These factors may make it easier for the student to repay the loan, even if they increase the cost. Also, when evaluating prompt payment benefits, you should carefully assess the likelihood that you will successfully qualify for the benefits. Being late on a single payment eliminates eligibility, and even if you qualify, the reduced interest rates only continue for as long as you continue to make the payments on time.


K-Factor
Loan with Total Debt:
Each Payment:
91-day T-Bill Rate:    
Prime Rate:    
Constant Maturity Treasury:    
Commercial Paper Rate:    
LIBOR (1 month):    
LIBOR (3 month):    
Interest Rate During the In-School Period: Fixed at
Variable with a spread of plus the:
       91-day T-Bill Rate
       Constant Maturity Treasury
       Prime Rate
       Commercial Paper Rate
       LIBOR (1 month)
       LIBOR (3 month)
Interest Rate During the Repayment Period: Fixed at
Variable with a spread of plus the
       91-day T-Bill Rate
       Constant Maturity Treasury
       Prime Rate
       Commercial Paper Rate
       LIBOR (1 month)
       LIBOR (3 month)
During the in-school period, the interest is
If the interest in unsubsidized, it is capitalized
and the in-school period, including grace periods, is months long.
Application Fee:
Default (Guarantee) Fee at Disbursement:
Origination Fee at Disbursement:
2nd Default Fee at Repayment:
   Months into Repayment:
Rebate origination fee less if the first payments are on time.
Reduce interest rate by if the borrower pays by EFT.
Reduce interest rate by if the first payments are on time.
Loan Term (Years):
Start Over

The Constant Maturity Treasury (CMT) is the 1 year rate. The Commercial Paper Rate (CPR) is the 3 month financial rate. The Prime Lending Rate is the weekly rate. All rates are the most recent weekly (Friday) rate, except for the Prime Lending Rate which is the most recent weekly (Wednesday) rate.

 

 
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