Student Education Loan Fund, Inc (Abridge)

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Student Education Loan Fund, Inc (Abridge) Introduction Background of case Study Rick Melnick is an Associate Director of Financial Management at Harvard Business School (HBS). He had decision to make regarding the new funding policy under the management of Student Educational Loan Fund (SELF). SELF was established in 1961 to fund loans to HBS. Traditionally, HBS student loans required the borrower to pay semi-annually with variable interest rate policy. Under the new plan, the students would receive monthly paid plus fixed-rate interest. With this new plan the management believed that it will reduce the rate of delinquency among the students. Basically in 1996, the tuition fee for two-year MBA program at HBS was $42,000. The…show more content…
citizens and permanent residents | U.S. citizens and permanent residents, citizens of Australia, Canada, Mexico and etc | Limits: Annual Aggregate | $8,500 (subsidized) $18,500 (total) N/A | $5,000 Subject to availability | Education cost minus other financial aid Subject to bank discretion | N/A Total must not >$62,000 | Fees: Interest rate | 4% Reset each July based on recent 13-week T-Bill rate + 3.1%; capped at 8.25% | None 5% fixed | 5-10% Varies (typically prime plus 1.5%-2.0%) | None Reset every 6 months base on SELF’s cost of capital | Repayments: Commence style | 6 month after graduation Monthly | 6-9 month after graduation Monthly | Varies Monthly | 6 month after graduation Semi annually | Loan maturity (maximum) | 10 years | 10 years | 10-25 years | 5 years | Question 2 Ignoring prepayment risk, what fixed-rate should SELF set on its loans, given the data in the case? (Assuming that the rates are being set for students who will graduate & begin to pay off their loan in the current month.) LIBOR + BP* Fixed- rate *BP=Basis Point * 5% of unused part of commitment is $318,000 (1995) with an average of unused portion 318,000/0.05 = $6.36 mil. Due to SELF’s loan from 2 banks the portion will be equal to = 15 Million, if calculated the total of unused commitment will be equal to = 42%

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