Financing Flight Training - What does it take?

[jehh]

With all the questions out there about funding flight training, I thought I'd post a few thoughts on who gets approved, and who doesn't.

 

This experience comes from running about 400 loan applications through Sallie Mae over the past year, and while I do not get to see the actual credit reports, from my conversations with Sallie Mae and applicants, I've gotten an idea of what gets approved and what doesn't.

 

This being said, your mileage may vary, I get surprised from time to time by what they do.

 

Keep in mind that a real human being, an underwriter, will look at your credit report (this is why you don't get instant decisions). You also have the right to request a review and provide additional documentation after the initial answer, so if you have other assets or money in the bank, that often helps. We had one kid who had his Dad co-sign. He got approved for $20K. Dad complained, saying he had a high net worth. He submitted personal financials to Sallie Mae, they increased the offer to the full amount of training with full financials (including tax returns).

 

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First, this is not a "student loan", it is a private credit based loan that has nothing to do with the Title IV Department of Education loan system.

 

Second, this is not about how high your credit score is, but how thick your credit file is. We get people approved with 650 point scores and get denials at 750 points because of this.

 

It isn't that hard to have a 750 point score, buy a car, make your payments, have a few credit cards that you use but carry no balance, and have 1 to 3 inquiries a year with 3 to 5 years total credit history, and poof, you have a ~750 point score. You won't get a $70K Sallie Mae loan with that score.

 

Take another situation, someone who has a 10 year credit file, prior student loans that are paid off, or at least 50% paid off, other large unsecured debt history, perhaps a $25K credit card that has been used and paid in full, or at least below 30% full. That person may have a 650-700 point score, yet get approved for a lot more money than the first example.

 

Creditors like thick credit files, regardless of the score. They often have bottom score limits they can approve, and sometimes the score affects interest rates, but it really is more about the history of the file than about the score. 40 reporting accounts is far better than 10, assuming they are paid on time and have reasonable utilization (percentage of available credit to used credit)

 

Some people make the mistake thinking that if they pay cash for things, only have one or two credit cards, and save their money, lenders will want their business. The issue there is the lender has nothing to base a risk assessment of repayment on, there isn't enough history. Having assets also doesn't always help, because you may have a lot of stuff, but have a poor payment history. Also, the lenders point of view is that if you really have so many assets, why do you need his money? The exception is co-signers. If you have a co-signer with assets, that does seem to help.

 

The interest rates are Prime + 0% to Prime + 6%, depending on credit and DTI ratio. Add 1% if you take the deferred payment option. Prime is now 7.75%, so the highest interest rate you'll pay is 14.75%. The APR may be higher because Sallie Mae likes to add a supplemental loan fee (really an origination fee, their charge to do the paperwork) of between 1% and 6.5% of the loan amount. That is why you can see an APR higher than 15% on a loan that has a 14.75% interest rate.

 

At the end of the day, this is a lot of money, however if you cannot imagine doing anything else, then why not. What else are you going to do, sit behind a desk all day until you're put in a box after 40 years?

[Sparker]

With all the questions out there about funding flight training, I thought I'd post a few thoughts on who gets approved, and who doesn't.

 

This experience comes from running about 400 loan applications through Sallie Mae over the past year, and while I do not get to see the actual credit reports, from my conversations with Sallie Mae and applicants, I've gotten an idea of what gets approved and what doesn't.

 

This being said, your mileage may vary, I get surprised from time to time by what they do.

 

Keep in mind that a real human being, an underwriter, will look at your credit report (this is why you don't get instant decisions). You also have the right to request a review and provide additional documentation after the initial answer, so if you have other assets or money in the bank, that often helps. We had one kid who had his Dad co-sign. He got approved for $20K. Dad complained, saying he had a high net worth. He submitted personal financials to Sallie Mae, they increased the offer to the full amount of training with full financials (including tax returns).

 

----------------------------------------------------

 

First, this is not a "student loan", it is a private credit based loan that has nothing to do with the Title IV Department of Education loan system.

 

Second, this is not about how high your credit score is, but how thick your credit file is. We get people approved with 650 point scores and get denials at 750 points because of this.

 

It isn't that hard to have a 750 point score, buy a car, make your payments, have a few credit cards that you use but carry no balance, and have 1 to 3 inquiries a year with 3 to 5 years total credit history, and poof, you have a ~750 point score. You won't get a $70K Sallie Mae loan with that score.

 

Take another situation, someone who has a 10 year credit file, prior student loans that are paid off, or at least 50% paid off, other large unsecured debt history, perhaps a $25K credit card that has been used and paid in full, or at least below 30% full. That person may have a 650-700 point score, yet get approved for a lot more money than the first example.

 

Creditors like thick credit files, regardless of the score. They often have bottom score limits they can approve, and sometimes the score affects interest rates, but it really is more about the history of the file than about the score. 40 reporting accounts is far better than 10, assuming they are paid on time and have reasonable utilization (percentage of available credit to used credit)

 

Some people make the mistake thinking that if they pay cash for things, only have one or two credit cards, and save their money, lenders will want their business. The issue there is the lender has nothing to base a risk assessment of repayment on, there isn't enough history. Having assets also doesn't always help, because you may have a lot of stuff, but have a poor payment history. Also, the lenders point of view is that if you really have so many assets, why do you need his money? The exception is co-signers. If you have a co-signer with assets, that does seem to help.

 

The interest rates are Prime + 0% to Prime + 6%, depending on credit and DTI ratio. Add 1% if you take the deferred payment option. Prime is now 7.75%, so the highest interest rate you'll pay is 14.75%. The APR may be higher because Sallie Mae likes to add a supplemental loan fee (really an origination fee, their charge to do the paperwork) of between 1% and 6.5% of the loan amount. That is why you can see an APR higher than 15% on a loan that has a 14.75% interest rate.

 

At the end of the day, this is a lot of money, however if you cannot imagine doing anything else, then why not. What else are you going to do, sit behind a desk all day until you're put in a box after 40 years?

 

In your experience does it seem like the student getting full financing is stressed out during his/her CFI time building?

 

Have you had a CFI working for you that was making payments on a loan like that?

 

I am curious about real world example and success stories of students finishing up buried in debt and surviving.

 

Good info,

 

Thanks

[jehh]

Merry Christmas to the forum...

 

Figured I'd bump this up for those who might be considering a new career next year, and how to pay for it.

 

To answer Sparker's question (which I missed 2 months ago):

 

Some students are stressed over the money, others are not. I suspect that your views on money, responsibilities towards paying it back, and support from family are the key factors there.

 

About half our CFIs have loans, the other half paid cash. Those that have loans generally do not get paid back until after being a CFI. You really cannot afford the loan payments on what you'll earn as a CFI, so we structure the loans to account for that (providing 2 years before payments start).

 

A former CFI of mine left in December 2006 to work for Air Log with about 215K in student loans (that includes college loans for Embry Riddle as well as flight training in both airplanes and helicopters). His payment was very reasonable and he did pay it while working for us. He consolidated back when the interest rates for federal loans were in the 4% range, so his payment is quite reasonable. One of the benefits of going to college while you train. Funny thing is, his payment is about the same as those who borrow $75K directly for training at 3 times the interest rate. This is why we promote the college thing, get a degree and perhaps spend less for training, makes the degree free and the training cost less.

 

Fly Safe!

[Rogue]

thanks for the post, merry christmas yourself. this is good information for me thanks again.

[freebird04]

jehh:

 

So what is your advice for someone with a 10yr, but poor-fair credit history (my scores are 550-630 right now). I have a student loan I think is half paid at about $1500 and I bought a car in march, and make all payments on time. Have a cc I pay in full, but limit is only $300. In Jan all past credit issues will be paid off. What can I do in the next year to make myself more attractive to SM? I dont want to wait too much longer, as it is getting harder and harder to get loans/jobs etc in this field.

 

Another question, SM says you can have your cosigner released after 2 yrs of ontime payments - is that starting after the deferment? To release them 2yrs after they sign for you, you would have to start making payments immediately? You say that you can't afford payments as CFI - how much are payments per month?

 

Thank you very much - this is very valuble information!

[fry]

jehh:

 

So what is your advice for someone with a 10yr, but poor-fair credit history (my scores are 550-630 right now). I have a student loan I think is half paid at about $1500 and I bought a car in march, and make all payments on time. Have a cc I pay in full, but limit is only $300. In Jan all past credit issues will be paid off. What can I do in the next year to make myself more attractive to SM? I dont want to wait too much longer, as it is getting harder and harder to get loans/jobs etc in this field.

 

Another question, SM says you can have your cosigner released after 2 yrs of ontime payments - is that starting after the deferment? To release them 2yrs after they sign for you, you would have to start making payments immediately? You say that you can't afford payments as CFI - how much are payments per month?

 

Thank you very much - this is very valuble information!

 

Payments on $70k deferred for one year will run about $800 a month...for twenty years.

[jehh]

jehh:

 

So what is your advice for someone with a 10yr, but poor-fair credit history (my scores are 550-630 right now).

 

Sallie Mae will not lend to anyone with a FICO below 620. They pull randomly from all three, so who knows who you'll get pulled.

 

Also, make sure you are pulling FICO. Fake credit scores are worthless (we call them FAKO scores).

 

http://www.myfico.com/

 

With few exceptions, that is the only place to get your real credit score. Everything else is just a made up number (and yes, that includes "MyFreeCreditReport.com and all the other sites). If you have a WaMu/Providian credit card, you get a monthly FICO from TransUnion for free on-line with that card.

 

I have a student loan I think is half paid at about $1500 and I bought a car in march, and make all payments on time.

 

The student loan helps, however if the total balance was $3K, it doesn't help much. Sallie Mae wants to see a history of unsecured credit use. The car hurts, not helps, as it affects your debt to income ratio.

 

Have a cc I pay in full, but limit is only $300. In Jan all past credit issues will be paid off.

 

Again, $300 isn't relevant when you're looking at borrowing north of $50K.

 

What can I do in the next year to make myself more attractive to SM? I dont want to wait too much longer, as it is getting harder and harder to get loans/jobs etc in this field.

 

Get yourself a co-signer, the only people who get approved for the full amount already have the money in the bank.

 

If the co-signer doesn't help, then on-line college is another option, one that about 1/4 of our students follow as it is the only way to get the money to pay for this.

 

Another question, SM says you can have your cosigner released after 2 yrs of on-time payments - is that starting after the deferment? To release them 2yrs after they sign for you, you would have to start making payments immediately?

 

2 years after you start making payments of principle and interest, so 4 years from the time you take out the loan, if you accept our 2 years of deferred payments. Also keep in mind that release is not guaranteed. They will pull your credit again and evaluate you based on your payment history not just of the SLM loan, but of all your debt.

 

You say that you can't afford payments as CFI - how much are payments per month?

 

Payments will depend on interest rates of course, and how much of an origination fee they charge (prepaid interest to write the loan)

 

$70K borrowed with no deferred payments, 15 years to repay (SLM does not do 20 years AFAIK), your monthly payment will be about:

 

7.5% - $648.91

10.0% - $752.22

12.5% - $862.77

15.0% - $979.71

 

$70K borrowed with 2 years of deferred payments, 15 years to repay, your monthly payment will be about:

 

(SLM adds 1% for deferred payments, and the 2 years of interest is capitalized into the principle)

 

Principle owed at start of repayments is shown in parentheses

 

8.5% - $811.48 ($82,405.75)

11.0% - $980.28 ($86,247.00)

13.5% - $1,170.77 ($90,175.75)

16.0% - $1,383.40 ($94,192.00)

 

As you can see, deferred payments add a lot to the principle and monthly payment. Not making payments for 2 years is expensive. Since SLM does not charge a prepayment penalty, anything you can pay towards this while in training will help. Even $200/month makes a different to the outcome.

 

As far as paying this on a CFI's salary, CFIs make about $25K a year, give or take, their first year as a CFI. I don't know about you, but even the lowest payment above is not affordable on that income.

 

The idea is to defer payments until you're making $60K a year in the Gulf of Mexico, at that point you could afford even the $1,383.40 monthly payment. For what it is worth, our average student has about $1,000 a month in future payments to look forward to. That is 20% of their starting pay in the Gulf of Mexico. Expensive, but do-able, so long as you're willing to live on $48K instead of $60K for awhile. If this is what you really want to do, that isn't a huge sacrifice.

 

Thank you very much - this is very valuble information!

 

You're welcome...

 

If you want to learn more about how credit really works, go visit the forums on CreditBoards... One of the best forums for financial information around. Unless you enroll in College, ignore the "Student Loans" section, those are for college loans only, not for this. Go to the general credit forum and read for a few hours. You'll get a heck of an education.

 

http://creditboards.com/forums/

[freebird04]

jehh:

 

You have a knack for providing valuable and useful information with good, clear references and examples. thanks for taking the time to answer my questions. i'm sure many others will find it helplful as well